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RAVEN 2007 Annual Report

for the fiscal year ended January 31

The Strength of Raven

About Raven

Raven has a strong business model that creates sustain-

able growth. We reached our sixth-consecutive year of

record earnings – in the face of some tough markets –

because we continue to invest in long-term growth.

During the last six years, we also improved key performance

measurements by focusing on cash returns on invested

capital. The combination of these factors allowed us to

reward shareholders with the 20th-consecutive increase in

the annual dividend.

Inside this Report

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . 1Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . 2Business Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Operations Review . . . . . . . . . . . . . . . . . . . . . . . . . . 811-Year Financial Summary . . . . . . . . . . . . . . . . . . . 16Business Segment Performance . . . . . . . . . . . . . . . . 18Financial Review and Analysis . . . . . . . . . . . . . . . . . 19Stock and Quarterly Performance . . . . . . . . . . . . . . . 30Management’s Report on Internal Control over

Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . 31Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 32Report of Independent Registered

Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . 43Directors, Officers and Senior Management . . . . . . . 44Investor Information . . . . . . . . . . . . . Inside Back Cover

FortheyearsendedJanuary31

Dollars in thousands, except per-share data 2007 2006 change

OPERATIONS

Netsales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 6 .4%

Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,302 37,284 2 .7%

Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,441 24,262 4 .9%

PER SHARE

Netincome–diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ 1 .32 5 .3%

Cashdividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.36 0 .28 28 .6%

Bookvalue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.45 4 .67 16 .7%

PERFORMANCE

Operatingincomemargin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.6% 18 .2% –3 .3%

Returnonnetsales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7% 11 .9% –1 .7%

Returnonaverageassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.5% 24 .9% –9 .6%

Returnonbeginningshareholders’equity . . . . . . . . . . . . . . . . . . . 30.1% 36 .7% –18 .0%

Sharesoutstanding,year-end(inthousands) . . . . . . . . . . . . . . . . . 18,039 18,072 –0 .2%

Financial Highlights20

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2007

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120

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240

NET SALES(dollars in millions)

EARNINGS PER SHARE(dollars)

SALES PER EMPLOYEE(dollars in thousands)

Raven’s 13% five-year compound annual growth rate in sales reflects the strength of its business model.

Earnings expanded at a 24% compound annual growth rate over the last five years, as Raven increased sales, held the line on expenses, and improved productivity.

Sales per employee reached its ninth- consecutive record despite a 5% increase in number of employees for 2007.

1RAVEN2007ANNUALREPORT

To Our Shareholders, Employees and Customers

Our solid performance last year demonstrated the strength of Raven. In spite of shortfalls in two of our four operating units, we posted another record year for sales and profits. But it was not the kind of year we had hoped for. After five years of growth in the 25-35% range, last year’s earnings increased 5%. We don’t apologize for that performance – but we are not satisfied either. We understand the need to grow, to continuously improve everything we do, and to develop the best leadership team in our history.

Financial Highlights

We continue to achieve solid returns on invested capital, demonstrating the competitiveness and efficiency of our operations.

• Sales increased 6% to a record $218 million.• Net earnings were up 5% to $25.4 million, surpassing the previous year’s record. Earnings have grown for six consecutive years and have quadrupled in that time.• Investments in plant and equipment and product development increased by $6.3 million to $19.1 million for the year, setting the stage for future growth.• The quarterly dividend per share increased 29%, the 20th-consecutive annual increase. The share repurchase program continued and $4.2 million of our stock was retired. Overall, $10.7 million was returned to Raven shareholders.

FY2007 FY2006 FY2005 FY2004 FY2003

AnnualEPSGrowth 5 .3% 36 .1% 29 .3% 25 .0% 29 .0%

ReturnonEquity 30 .1% 36 .7% 26 .9% 23 .8% 21 .5%

ReturnonAssets 22 .5% 24 .9% 21 .3% 18 .2% 15 .9%

ReturnonSales 11 .7% 11 .9% 10 .6% 9 .7% 9 .3%

2

Ronald M. Moquist President & Chief Executive Officer

2

An Integrated Corporate Structure

Raven is neither a conglomerate nor a holding company. We are a diversified manufacturing enterprise that strives for an integrated approach where all operations support each other, sharing knowledge and best practices. Our four operating units have a common purpose and a culture that is ethical and action-oriented. Standardizing and centralizing support functions such as accounting, human resources and information technology gives us an organizational structure that has consistency and efficiency, while allowing our operating managers autonomy in leading their businesses.

Strong Business Units

Raven’s foundation is its four business units, which are among the leaders in their niche markets. As a group, they have the ability to grow 12-15% annually and to generate attractive returns on invested capital.

Our Engineered Films Division (EFD), led by Jim Groninger, produces reinforced plastic sheeting for industrial, construc-tion and agricultural applications. We avoid the commodity-type films you might find at a home improvement center or hardware store. Our production equipment is state-of-the-art, allowing us to produce up to seven-layer films with custom-ized physical and performance properties.

This division contributes 52% of income from our operating units. It increased sales 10% to $91.1 million, and operating income 18% to $23.4 million for the year. Operating margins increased 1.7 percentage points in spite of price volatility in plastic resins – the raw material cost that accounts for 60% of its sales.

We invested heavily in new capacity and technology. Capital expenditures last year totaled $13.3 million. Production capacity was expanded from 50 million pounds of plastic film to 80 million pounds, allowing us to meet our growth projections over the next three years with no new major capital expenditures.

Sales last year included $9.9 million in hurricane disaster film versus $11.4 million in the previous year. Hurricane damage in the United States was minimal this last season and inventory in the field is high, so we are not forecasting any large orders in the year ahead. A new product, Geomembranes – heavy-duty permanent liners used in landfills and large holding ponds – should pick up half of the lost sales.

The Flow Controls Division (FCD) is guided by Dan Rykhus. This business improves the efficiency of various farming operations and marine navigation products by using GPS-based location and speed-compensated systems.

FCD represents 22% of income from our operating units. This operation had its first down year since fiscal year 2000 in the cyclical agricultural market. Lower crop prices, higher input costs and uncertainty about the 2007 Farm Bill contributed to a 4% decline in sales and a 26% drop in operating income, to $45.5 million and $10.1 million, respectively. Some of our new products did not generate the sales we had projected, and our marketing efforts in Brazil, Canada and Europe have not yet produced significant returns.

The combination of recently introduced new products (such as GPS steering systems, plus ultrasonic-based combine header-height and spray boom-leveler systems) and an improved North American agriculture economy make us optimistic about the coming year. We believe farm income will increase by 5%, driven by higher commodity prices. Corn acreage, which requires a greater use of nitrogen and pesticide application, is expected to increase 7-10%. Sales in our international markets


should grow modestly. Brazil’s weak agricultural markets will take time to correct, but Canada and Europe are both ripe for increased sales of Raven products. We look for significant improvement in sales and profits for FCD in the coming year.

The Electronic Systems Division (ESD), led by David Bair, has a unique business model in the electronics manufacturing services market. We work with a small base of Fortune 500 companies and focus on low-volume, high-mix production that requires a high degree of engineering support and customer service.

ESD had another outstanding year, with double-digit growth in sales and operating income. Sales were up 18% to $66.3 million, and operating income rose 22% to $10.9 million. This division continues to benefit from our No Waste – Six Sigma quality and efficiency enhancement programs. This is not a high margin business, but it has the capacity to generate solid returns on invested capital and to throw off cash. In doing so, it plays an integral part in our overall corporate strategy.

Our Aerostar International subsidiary, spearheaded by Mark West, manufactures high-altitude research balloons and aerostats, military parachutes and specialty protective outerwear for security forces. The initiatives we discussed last year did not progress as rapidly as we envisioned, resulting in a 19% decrease in sales to $14.7 million, and a drop in operating income from $2.1 million to $700,000.

Aerostar is the only supplier of high-altitude research balloons and aerostats in the U.S., and this is the area we will focus on. We believe there are many opportunities for selling aerostats to government, academic and commercial markets for use in communications, intelligence gathering, reconnaissance and scientific research.

Aerostar’s current backlog is now a healthy $18 million, up from $5 million the previous year. This represents a cross- section of important, ongoing programs that will drive the business in this and future years. The new MC-6 parachute contract, worth $6.7 million, is scheduled to ship this year and is just one example of how Aerostar has turned the corner.

How We Grow

Despite an earnings slowdown this past year, we believe Raven is executing a solid business plan that can generate average sales growth of 12% and earnings increases of 15%. We are a leader in our niche markets and stay out of low-margin commodity-type businesses. We don’t chase cheap labor – it’s not sustainable. We will expand our four businesses by improving efficiencies, developing new products, and finding new market opportunities. We will continue to narrow the focus of our four operating units as we build them into even larger businesses, allowing us to maintain our competitive advantage.

An example of that constant re-focusing is our recent exit from hot air sport ballooning. The modern-day hot air balloon was developed by Raven in 1960 and is part of our heritage. Market demand has dropped to such a low level that we will discontinue production, but support and service product in the field, and stay active in safety and regulatory issues.

Operational Efficiencies

To be a leader and grow profitably, we must achieve operational excellence. This involves a constant drive to improve quality, reduce cost and increase speed. We challenge everything we do and continuously improve all parts of the business. In doing so we improve customer satisfaction, operating margins and the use of our working capital. We set an annual productivity improvement goal of 6%.

4

New Products – New Markets

Raven has an aggressive strategy to create new products. Last year we invested a record $2.6 million in product develop-ment, most of which was spent in FCD. Innovative products will be the key driver in Raven’s organic growth.

New markets are selected based on size, fit and our ability to lead, succeed, and have some control of pricing. Our focus remains on expanding domestic markets, but we will pursue growth worldwide. Raven’s international sales have grown by 70% over the past two years.

Acquisitions

Raven seeks acquisitions that can be bolted on to one of our existing operations and can immediately contribute to earnings growth, all at the right purchase price. This is a tough standard and explains why we do so few acquisitions.

Cash Management

We take pride in our strong balance sheet and the flexibility it provides. We have no debt, and cash and investments of $10.8 million. We continue to generate strong cash flow and, with our reduced budget for capital expenditures this year, our cash reserves could reach $25 million, net of dividends and stock repurchases. Dividends will increase again this year, and we will continue our stock repurchase plan.

Strong Governance

The primary goal of Raven’s Board of Directors is to provide oversight on how well management is serving all stakeholders. We benefit greatly from a board that is strong, independent and seasoned. The average tenure of our seven directors is 18 years. In some organizations that could lead to complacency, but at Raven it has strengthened the confidence to question and to challenge the key issues. We don’t rely on consultants to tell us what is right or ethical. That comes with experience, good judgment and a deep understanding of our business.

Success is Built on Talent

Ultimately our success will depend on our ability to develop people who have the skills and energy to lead the company and execute the growth strategy. We hire talented people, keep the best, and give them opportunities to grow. My thanks to our 900 employees who bring their best to work every day. Raven is a tremendous company. I’m excited and confident about our future as we close out our 51st year in business. Thank you for your continuing support and confidence in our company.

Ronald M. MoquistPresident & CEOMarch 28, 2007


Business ProfileRaven’sfourbusinessessharethesegrowthcharacteristics:

• Significantshareintheirnichemarkets,whichsupportsstrongprofitability• Abusinessmodelthatavoidslabor-intensivecommodityproducts–andoffshorecompetition• Strongcashgenerationandcontinuedreinvestmentincapabilitiesandcapacity• Acquisitionsthatareincremental–notinstrumental–togrowth• Ahighlevelofcustomerservicethroughacombinationofstrongproductdevelopment,materialsmanagement, engineeringsupportandaqualitylaborforce,aswellasareputationforintegrity

Thisapproachallowsustooutperformourcompetitors,generatestrongcashflow,andcontinuetocreatevalueforshareholders .

Autoboom™automaticallycontrolsboomheightforuniformsprayingAccuBoom™automaticallyturnsboomsectionsonandoff,reducingoverlapEnvizioPlus™combinesthemostadvancedguidanceandsteeringsystemswithboomsection,heightandapplicationinformationPhoenix™GPSreceiversprovideaccurateandreliablenavigationandpositioningdataSCSSeries™ratecontrollersofferdataonsprayertankvolume,fieldcoveredandapplicationrateSCSSidekick™directinjectionsystemseliminatetankmixingofpesticidesSmarTrax™andQuickTrax™automaticallysteertractorstopreventoverlapandskipViper™onboardtouch-screencomputerusesamapofthefieldandaspecificprescriptiontoproperlyapplyanddatalogpesticidesStarlinkPortablePilotSystem™isacarry-aboardnavigationalaidforprofessionalshippilots

•••••••••

RUFCO®extrudedpolyethylenefilmcanbeformulatedandtailoredtoacustomer’sspecificationsDURA-SKRIM®“RSeries”extrusionlaminatedpolyethylenefilmfeaturespolyesterreinforcementstopreventtearingindemandingapplicationsDURA-SKRIM®“JSeries”heavy-dutypermanentlinersareusedinlandfillsandlargeholdingpondsconKure™blanketsusedtocureconcreteinhotweatherarelightweight,easytoapplyandresistrotandmildewFORTRESS™bunkercoversprotectgrainandanimalfeedfromtheelementsVaporBlock®vaporretardersusestate-of-the-artpolyethylenetopreventmoisturefromseepingthroughconcreteslabsorwallsCANVEX®reinforcedplasticsheetingiswovenwithcriss-crossingstrandsofpolyethylenetobelightweightandresisttearing

••

••••

•

Provideoutsourcedmanufacturingoflowvolume/highmixindustrialproductsthatstanduptoharshenvironmentswithgreatreliabilityHandlerepair/warrantyservicemanagementandproductdistributionProvidehighlevelsofengineeringsupportandcustomerservice

•

••

High-altitudeaerostatsCustom-shapedinflatablesClothingthatprotectsfromexposuretobiochemicals,fuelsandfumes,extremecoldweatherandotherharshenvironmentsMilitaryparachutes

••••

Operating Unit Products/Brand Names

Flow Controls

Engineered Films

Electronic Systems

Aerostar

6

DomesticandinternationalagriculturalOEMsandsprayermanufacturers

Agriculturalequipmentaftermarket

Precisionsteeringsystems

Marinenavigation:GPSapplications

•

•

•

•

Increasedinvestmentinproductdevelopment,salesandmarketing,andinternationaldistribution(particularlyinEuropeandSouthAmerica)toaddresssoftnessinU .S .agriculturalmarket

Majorproductintroductions:1)EnvizioPlus,2)PhoenixGPSreceivers,3)AccuBoom,and4)QuickTrax

•

•

Geomembranesandcoversareusedasoilfieldpitliners,floatingcovers,remediationlinersandcovers,landfillcapsandinterimlandfillcovers,pondliners,andcanallinings

Construction:temporarybuildingenclosures,housewraps,disasterfilms,vaporretarders,gasretarders

Manufacturedhousing:transitenclosures,housewraps

Industrial:multilayerpackagingfilms,laminationfilms,containmenttubing

Agriculture:temporarygraincovers,silagebunkercovers,poultryhouseceilings,andwastedisposalliners

•

•

•

•

•

Verticallyintegratedmanufacturer:offeringextrudedblownfilm,laminationandconversion

Broadproductlineincluding1to7layerco-extrudedfilmandsheeting,and3to45milreinforcedlaminatedmaterials

Superiortargetmarketing

Highproductivityandlowcoststructure

R&Dteamdevelopscustomizedsolutionsforcustomers

ISO9001:2000certification

•

•

•

•

•

•

Capitalizedonstrongdemandinoilandgas,environmentalandconstructionmarkets

Investedinequipmentthatwillincreaseextrusioncapacityby60%infiscal2008

Installedequipmenttoproducecomplexspecialtyfilmsofupto7layers

•

•

•

CustomersareprimarilyindustrialOEMsinNorthAmerica

CustomersincludeFortune500companiesthatcontractlow-volume,high-mixproduction

Marketsservedincludeindustrialcontrolsandinstrumentation,aerospace/aviation,communication,defenseandmedical

•

•

•

Advancedmanufacturingtechnology

Full-serviceprovider,fromengineeringandmanufacturingtocustomerservice

Closepartnershipwithcustomers

ISO9001:2000certification

•

•

•

•

BecamethesecondfacilityintheworldthatwascertifiedbytheIPCtobecapableofproducinglead-freeelectronicsassemblies

Continuedtoleverageimprovedproductionefficienciestodeliverhighcustomervalueandstrongmargins

•

•

Exitedhotairballoonmarket

Sawsolidinterestinnewtechnicallyadvancedhigh-altitudeinflatables,targetinglong-distancecommunications,datarelayandreconnaissanceuses

SecuredMC-6parachutecontract

•

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•

Reputationforinnovationandquality

SolesourceinU .S .forscientificresearchballoons

Besttechnologyforhigh-speedsewingandsealing–withmachinesdevelopedandbuiltin-house

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U .S .andforeigngovernments

NASA

Scientificagenciesanduniversities

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Markets/Product Uses Competitive Strengths 2007 Milestones

Sales by Operating Unit Income by Operating Unit

Flow ControlsEngineered Films Electronic Systems Aerostar

Marketleaderforagriculturalsprayercontrols

Highinstalledbaseofsprayercontrolstowhichweaddcomplementaryproducts

Strongbrandrecognitionanddistributionnetwork

Widerangeofprecisionagriculturalproducts

•

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“Our #1 advantage is the

ability to make plastic film

do virtually anything that

customers need it to do. Unlike

competitors, we don’t develop

a product then go looking for

someone to buy it. We work

with customers to create a

solution – and develop long-

term relationships with them

as a result.”

Engineered Films Division

JamesD .Groninger,Division Vice President and General Manager –

Engineered Films Division

Waterpreservationhasthepotentialtobecomeoneofthelargestmarketsthatwereach .EngineeredFilmsservesthismarketbydesigningandproducingpondandcanallinersthatdonotshrinkovertimeandareavailableinwidersizes,sofewerseamsneedtobesealedduringinstallation .Thisdecreasesthelikelihoodofwaterlossthroughseepageandbrokenseals .

T H E S T R E N G T H O F R A V E N

8

What We Do

Reinforced plastic sheeting can be a commod-ity product. We avoid this by applying our experience and the latest technology to enhance the properties of film and sheeting to meet each customer’s needs. We become a customer’s R&D department, creating a higher value product. Then we manufacture the plastic film our customer requires, and seek opportunities to turn this into a proprietary product others will buy.

In addition to our strong background in formulat-ing custom plastic films, Engineered Films has other competitive advantages. We are unique in the indus-try, with capabilities for both blown film extrusion (melting plastic pellets to create the plastic sheeting), and lamination and conversion (customizing the sheeting with special properties, such as string rein-forcements). We also believe we are the only company in plastic film conversion with an ISO 9001:2000 certification.

Engineered Films invested in technology and equip-ment that is new to its marketplace. This helps us maintain a low cost structure with high productivity. It also allows us to quickly serve “hot spots” in our market – such as disaster films. We either help these opportunities grow into permanent business, or turn quickly to something else if demand is temporary or seasonal.

Our more than 40 years in this market – plus our experienced staff and solid reputation – mean that nearly 30% of our business comes from customers contacting us first. We serve virtually every industry, with the exception of consumer packaging, food and medical. This led us to develop a diverse customer base and a broad product line.

Where We Are Going

The markets we reach generate hundreds of millions of dollars in revenues each year. With the exception of the oil and gas industry, we are not a major player. This gives us many opportunities to approach custom-ers that want to upgrade their existing products for higher performance. Companies do this because their plastic sheeting does not meet their needs, or to avoid paying for properties they do not need. Our

wide range of products – and expertise in creating custom films – ensures customers receive the solution they seek.

Our expansion is supported by strong markets with opportunities for growth. Oil and gas – the largest contributor to our revenues – is expanding as high prices spur exploration. Commercial construction continues solid, and while residential construction is down from recent records, it remains a good market.

Over a year ago, it became clear that we needed to improve our sales coverage. We now have one sales team focusing on core customers, as well as pursuing additional opportunities in markets we serve. Our second sales team develops new products and pursues new types of customers. Because we have very low turnover, we benefit from an experi-enced staff that has long-term relationships with our customers.

We also are creating partnerships with those who reach a number of industries. This includes educating architects and engineers. Once we explain how our materials perform – supporting their visions for build-ings, roads and other infrastructure uses – they can specify our products into their designs.

Since our operations generate good levels of cash flow – and are backed by the power of Raven Industries – we invested in equip-ment that our peers cannot, including three new extrusion lines that increase our capacity by 60%. And by quickly changing our equip-ment from manufacturing one product line to another, we can weather near-term changes in market dynamics and continue to deliver solid growth.

Engineered Films’

manufacturing

campus expanded

in fiscal 2007 as this

group increased its

extrusion capacity by

60% to 80 million

pounds a year.

ENGINEERED FILMS SALES(dollars in millions)

02 03 04 05 06 07

$35.8 $35.1$42.6

$58.7

$82.8$91.1


“We are known for introduc-

ing new precision agricultural

products that help increase the

efficiency of farmers and those

who serve them. Our nearly 30

years in agriculture give us an

advantage over competitors.

Flow Controls operating strat-

egy is built on a reputation for

reliable products, long-stand-

ing customer relationships and

unmatched customer service.”

Flow Controls Division

DanielA .RykhusExecutive Vice President and General Manager –

Flow Controls Division


FlowControlshasdevelopedanumberofproductsovertheyears–devicesthatmanagetheapplicationrateofliquidpesticides,controlsprayerboomsandallowforhands-freenavigation .WeoffertheseproductsbothintheaftermarketandtoOEMsthatwanttobuildourcomponentsintotheproductstheyoffer .ThebreadthofdevicesofferedbyFlowControlsmakesRavenanattractivepartnerforOEMs .

10

What We Do

Our roots – and core strengths – are in the U.S. agricultural sprayer control market. Farmers need to apply fertilizer and other chemicals in the most efficient way – not “overspraying” some areas and missing others. This is a chal-lenge when they are driving a sprayer with a 120-foot boom, at 20 miles per hour, over rough terrain. Individuals and companies turn to Raven because they see the payback for investing in very reliable sprayer controls that have a long life.

In the late 1990s, we began expanding our line with complementary products. One of our goals became to introduce technology to agriculture that was already improving efficiencies in other industries. We developed onboard computers that can be taken from one piece of equipment to another, field operations data collection tools, steering and guidance systems using GPS (Global Positioning System), and improved touch-screen controls inside the cab. We create most of these innovations in-house, occasionally making acquisitions to add new products. Then we manufac-ture the products at our Sioux Falls headquarters.

Our technology has a high adoption rate in the North American agricultural market, with the aftermarket accounting for about 60% of our annual sales. We support our channel partners with repair and service programs, and a comprehensive product training sys-tem. We also are building our sales and service orga-nization, adding precision ag specialists to match the growing complexity of today’s higher tech products.

Where We Are Going

The U.S. agricultural equipment market – which accounts for most of our sales – was soft in fiscal 2007, reducing Flow Controls revenues and operat-ing income. In addition, we had some issues with GPS receiver performance in certain regions, which

was addressed by introducing a more robust product line: the Phoenix series. We are very committed to the agricultural business in the long term, and have ac-celerated near-term tactics to increase revenues.

Our primary approach to growth is introducing in-novative products. Last year this included 1) a new line of boom management products, including our improved boom leveling system; 2) the Envizio Plus, which combines advanced guidance and steering systems with boom section, height and application in-formation; and 3) Phoenix GPS receivers, which offer accurate and reliable positioning and navigation data.

Another key tactic is building international sales. Over the past three years, the contribution from markets beyond the U.S. increased from 12% to 16% of rev-enues, as we strengthened our distribution in Canada, Australia, Brazil, Argentina, Europe and South Africa. We expect to continue leveraging our progress here.

An important part of our growth strategy is partnering with key agricultural equipment manufacturers. We integrate our broad family of precision ag products into their tractors, combines and planters to form a seamless control system. We can also help them design specialized systems for niche applications. This strategy is helping us reach beyond our tradi-tional strength in chemical sprayers.

Envizio PlusTM

combines the most

advanced equipment

guidance package

available with other

important features

– including auto-

matic boom section

and height control

– and conveniences

including a 3-D color

touch screen.

FLOW CONTROLS SALES(dollars in millions)

02 03 04 05 06 07

$23.2

$28.5

$35.1

$40.7

$47.5 $45.5


“The low-volume, high prod-

uct mix contract manufactur-

ing niche offers above-aver-

age returns and good growth

potential. Competitors can’t

easily duplicate our model,

which handles frequent engi-

neering and volume change

orders, uses cost-effective

manufacturing to produce

high-quality products, and

offers high levels of customer

service – all without going

offshore.”

Electronic Systems Division

DavidR .Bair,Division Vice President and General Manager –

Electronic Systems Division

ElectronicSystemscustomersconsiderittobeanextensionoftheirownmanufacturingcapabilities .Thedivisionhasaturnkeyapproachtomanufacturing:fromengineerswhohelpdesigncustomers’products,topurchasingprofessionalswhofindlow-costqualitymaterials,tomanufacturingstaffthatuseSixSigmaandLeantoimprovetheirprocesses,tostringentqualitycontrolexpertswhotestcomponentsbeforetheyareshipped .


12

What We Do

A frequent lament in U.S. manufacturing is that jobs are heading to markets where labor is cheaper. In this environment, Electronic Systems managed to double its sales in the last five years.

It is very difficult to do low-volume, high mix manu-facturing offshore. Changes in engineering specifica-tions can take too long to translate and implement. Product inspection may not be as thorough. Sending products through customs and international shipping can be time consuming. And quality issues, repairs and returns can become unwieldy between countries. This is why clients turn to us.

Electronic Systems goes beyond outsourced manufac-turing to provide a turnkey approach. Our engineers evaluate customers’ product designs, improving their functions and overall cost-effectiveness. Our purchas-ing experts find quality materials at the best price. Throughout the manufacturing process, we look for ways to improve productivity and quality at our Sioux Falls and St. Louis facilities, and reduce inven-tory, space and cycle times. We also can support our customers by handling the repairs and warranty service they provide to their customers.

Where We Are Going

We use four tactics to expand our business: con-tinue to grow with existing customers, identify and work with new customers, add new capabilities, and improve operating efficiencies.

Our clients generally are U.S. industrial product manu-facturers, or Fortune 500 companies that make small quantities of many products. Most of our revenue increases come from growing with our customers. Electronic Systems invests in automated equipment so its clients don’t have to. We can do this quickly because we are backed by the resources of Raven Industries, which gives us an advantage over most of our competitors.

When reaching new customers, Electronic Systems’ most powerful tool is word of mouth referrals. We target large, stable companies that want a good cultural fit between their organization and ours, and seek a high quality product rather than just look for the lowest bidder. The lead time on signing new

customers generally is about a year, and our goal is to add one or two each year. In addition to our traditional focus on producing industrial products that are reliable in the face of rugged use or a harsh environment, we are targeting the aerospace, medical and defense industries.

To be attractive to current and potential customers, we continue to add manufacturing capabilities that neither they nor our competitors can match. Last year, we became the second company in the world to be certified by the IPC to produce lead-free electronic assemblies. This is becoming particularly important, as European markets begin to require these types of products. In addition, we invested in automatic optical inspection systems to ensure the microscopic compo-nents increasingly required in our customers’ products will pass our quality standards.

We routinely turn to employee quality teams and Six Sigma projects to increase operating efficiencies. This allows us to share cost savings with customers while strengthen-ing our margins. Successful efforts include reducing the lead time on material purchases, improving the productivity and accuracy of our new business quotation process, and using design for manufacturability (DFM) to shorten the time it takes to create process instructions to manufacture one customer’s product from three or four days to three or four hours. Our next focus will be on improv-ing inventory turns.

Aerospace is a

market with

opportunity for

Electronic Systems.

Our customers

require the discipline

and documentation

central to our

business model.

ELECTRONIC SYSTEMS SALES(dollars in millions)

02 03 04 05 06 07

$32.3$38.6

$44.3 $47.0

$56.2

$66.3


“Aerostar is dedicated to

being a leader in the markets

it serves. We will achieve this

by leveraging the strengths

Raven was built upon: en-

gineering skills and quality

control systems that came

from our background in hot

air balloons, and high-speed

manufacturing that is the

legacy from our apparel busi-

ness. No competitor can match

our position.”

Aerostar

MarkL .WestPresident,

Aerostar International, Inc.

Ravenhasbeenanimportantcontributortothemodernballoonindustry .AerostarbuildsonthislegacybyworkingwithNASA,othergovernmentagenciesanduniversitiestodomorethandesignandbuildballoons .Wearecapableofhandlingallaspectsoftheproject,includingpropulsion,launch,commandandcontrol,andelectronics .


14

What We Do

Aerostar focuses on three niche markets: parachutes, high-altitude research balloons, and protective gear and clothing. (Last year, the company announced it was discontinuing its hot air balloon business because this could not meet Aerostar’s growth and profitability goals. However, we will continue to support and service existing customers.)

We manufacture parachutes that carry personnel and cargo for the U.S. military. Because we have designed and produced parachutes since Raven was founded over 50 years ago, we have extensive knowledge of the industry. Aerostar also has an advantage no competitor can match: a high-speed manufacturing process. We break parachute manufacturing into each required step. Then our internal design team creates and builds a machine – including the software – to handle that step. As a result, rather than focusing on sewing and sealing, employees only need to load and unload their machines. This minimizes training, maximizes profitability, increases production volume and speed, and means every item we make is identi-cal and has a high quality.

Aerostar is the world leader in designing and fabricat-ing high-altitude scientific balloons, and high-altitude airships for use in near space (50,000 to 200,000 feet above the earth). Balloons can be created to carry a number of payloads, including communications relays and observation platforms.

We are developing designs for ultra long duration balloons that can fly for weeks at a time. We also are designing station keeping airships, which could be propelled against the wind to stay in the same loca-tion. In addition to developing balloons and airships, our engineers also bring innovation to the controls for steering and communicating with them. Major customers for these products include NASA and other governmental agencies, with which we have a close working relationship.

Our protective gear provides safety and comfort to people facing exposure to biochemical agents, contaminants, cold temperatures or immersion in cold water, and hazardous fuels. Customers for these

products include the military, government, emergency services, commercial fishing, offshore oil and gas drill-ing, and police.

Where We Are Going

Our near-term growth should come as the military parachute contract for the U.S. Army that was delayed last year finally enters production this year. We also expect there will be follow-on contracts. This is impor-tant because current parachute designs are nearly 40 years old – when both soldiers and the amount of gear they carried were much smaller – so today’s paratroopers are subject to injury. We also continue to work with other military suppliers to provide protective clothing components for products they are creating, such as gas masks.

However, we believe the area of greatest opportunity for the longer term is high-altitude balloons and airships. Research universities want cost-effective balloon programs for conducting experiments in the upper atmosphere. They are encouraging us to develop either turnkey programs or “kits” they can use to help them accomplish this.

The military is interested in using airships to send continuous intelligence on conflict areas around the world. This is a lower cost alternative to the current approaches of diverting communication satellites already in orbit, or using aircraft as communication relays to stay in touch with soldiers in the field.

The potential markets for all of these appli-cations are quite large. Aerostar plans to capitalize on this as the only U.S. company with experience in flying a lighter-than-air, steerable airship in the stratosphere.

Steerable high-

altitude airships are

“platforms in the

sky” that can do

everything from

near-space experi-

ments for a univer-

sity, to providing

an economical

communications

relay station for

military operations.

AEROSTAR SALES(dollars in millions)

02 03 04 05 06 07

$20.8

$17.4

$20.7$21.7

$18.0

$14.7


16

ELEVEN-YEAR FINANCIAL SUMMARY

FortheyearsendedJanuary31Dollars in thousands except per-share data 2007 2006 2005OPERATIONS FOR THE YEARNetsales Ongoingoperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086 Soldbusinesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,529 204,528 168,086Grossprofit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,882 53,231 43,200Operatingincome Ongoingoperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,302 37,363 27,862 Soldbusinesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (79) — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,302 37,284 27,862Incomebeforeincometaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,835 37,494 27,955Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,441 $ 24,262 $ 17,891Netincomeas%ofsales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7% 11 .9% 10 .6%Netincomeas%ofbeginningequity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1% 36 .7% 26 .9%Cashdividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,507 $ 5,056 $ 15,298(b)

FINANCIAL POSITIONCurrentassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,219 $ 71,345 $ 61,592Currentliabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,464 20,050 20,950Workingcapital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,755 $ 51,295 $ 40,642Currentratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.45 3 .56 2 .94Property,plantandequipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,264 $ 25,602 $ 19,964Totalassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,764 106,157 88,509Long-termdebt,lesscurrentportion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9 —Shareholders’equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,268 $ 84,389 $ 66,082Long-termdebt/totalcapitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0% 0 .0% 0 .0%Inventoryturnover(CGS/year-endinventory) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 5 .4 5 .4CASH FLOWS PROVIDED BY (USED IN)Operatingactivities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,313 $ 21,189 $ 18,871Investingactivities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,664) (11,435) (7,631)Financingactivities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,277) (6,946) (19,063)Increase(decrease)incashandcashequivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,626) 2,790 (7,823)COMMON STOCK DATANetincomepershare–basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.41 $ 1 .34 $ 0 .99Netincomepershare–diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.39 1 .32 0 .97Cashdividendspershare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.36 0 .28 0 .85(b)

Bookvaluepershare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.45 4 .67 3 .67Stockpricerangeduringyear High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42.70 $ 33 .15 $ 26 .94 Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.46 16 .54 13 .08 Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.43 $ 31 .60 $ 18 .38Sharesoutstanding,year-end(inthousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,039 18,072 17,999Numberofshareholders,year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,992 9,263 6,269OTHER DATAPrice/earningsratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5 23 .9 18 .9Averagenumberofemployees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884 845 835Salesperemployee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246 $ 242 $ 201Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,237 $ 43,619 $ 43,646

All per-share, shares outstanding and market price data reflect the October 2004 two-for-one stock split, the January 2003 two-for-one stock split and the July 2001 three-for-two stock split. All other figures are as reported.

Price / earnings ratio is determined as closing stock price divided by net income per share – diluted.

Book value per share is computed by dividing total shareholders’ equity by the number of common shares and stock units outstanding.

(a) In fiscal 2003, 2001, and 2000, the company sold its Beta Raven Industrial Controls, Plastic Tank ,and Glasstite businesses, respectively.


2004 2003 2002 2001 2000 1999 1998 1997

$142,727 $119,589 $112,018 $113,360 $107,862 $108,408 $104,489 $101,869 — 1,314 6,497 19,498 42,523 46,798 47,679 39,576 142,727 120,903 118,515 132,858 150,385 155,206 152,168 141,445 33,759 27,515 23,851 21,123 24,217 24,441 24,929 25,287

21,981 16,861 13,788 7,417(c) 7,971 8,220 9,555 9,321 (355) 204 (613) 3,331(d) 2,606(e) 1,453 1,007 2,650 21,626 17,065 13,175 10,748 10,577 9,673 10,562 11,971 21,716 17,254 13,565 10,924 10,503 9,649 12,540(f) 11,915$ 13,836 $ 11,185 $ 8,847 $ 6,411(c)(d) $ 6,762(e) $ 6,182 $ 8,062 $ 7,688 9 .7% 9 .3% 7 .5% 4 .8% 4 .5% 4 .0% 5 .3% 5 .4% 23 .8% 21 .5% 18 .4% 11 .8% 10 .9% 10 .0% 14 .2% 15 .6%$ 3,075 $ 2,563 $ 2,371 $ 2,399 $ 2,895 $ 2,944 $ 2,709 $ 2,367

$ 55,710 $ 49,351 $ 45,308 $ 51,817 $ 55,371 $ 60,279 $ 57,285 $ 56,696 11,895 13,167 13,810 13,935 14,702 15,128 17,816 20,016$ 43,815 $ 36,184 $ 31,498 $ 37,882 $ 40,669 $ 45,151 $ 39,469 $ 36,680 4 .68 3 .75 3 .28 3 .72 3 .77 3 .98 3 .22 2 .83$ 15,950 $ 16,455 $ 14,059 $ 11,647 $ 15,068 $ 19,563 $ 19,817 $ 18,142 79,508 72,816 67,836 65,656 74,047 83,657 82,066 80,662 57 151 280 2,013 3,024 4,572 1,128 3,181$ 66,471 $ 58,236 $ 52,032 $ 47,989 $ 54,519 $ 62,293 $ 61,563 $ 56,729 0 .1% 0 .3% 0 .5% 4 .0% 5 .3% 6 .8% 1 .8% 5 .3% 6 .5 4 .4 5 .0 5 .9 5 .2 4 .9 4 .8 4 .5

$ 19,732 $ 12,735 $ 18,496 $ 9,441 $ 10,375 $ 8,326 $ 9,274 $ 7,088 (4,352) (9,166) (13,152) 9,752 6,323 (3,127) (4,979) (5,090) (6,155) (5,830) (8,539) (14,227) (16,326) (2,714) (4,884) (2,363) 9,225 (2,261) (3,195) 4,966 372 2,485 (589) (365)

$ 0 .77 $ 0 .61 $ 0 .48 $ 0 .31 $ 0 .26 $ 0 .22 $ 0 .28 $ 0 .27 0 .75 0 .60 0 .47 0 .31 0 .26 0 .22 0 .28 0 .27 0 .17 0 .14 0 .13 0 .12 0 .11 0 .10 0 .09 0 .08 3 .68 3 .21 2 .82 2 .53 2 .32 2 .21 2 .13 1 .96

$ 15 .23 $ 9 .20 $ 5 .88 $ 3 .48 $ 3 .04 $ 3 .79 $ 4 .29 $ 3 .92 7 .56 4 .38 3 .02 1 .88 2 .25 2 .54 3 .27 2 .67$ 14 .11 $ 7 .91 $ 5 .64 $ 3 .04 $ 2 .40 $ 2 .67 $ 3 .77 $ 3 .75 18,041 18,133 18,424 18,956 23,496 28,164 28,944 29,016 3,560 2,781 2,387 2,460 2,749 3,014 3,221 3,011

18 .8 13 .2 12 .1 9 .8 9 .2 12 .4 13 .7 13 .9 787 784 858 1,082 1,369 1,507 1,573 1,454$ 181 $ 154 $ 138 $ 123 $ 110 $ 103 $ 97 $ 97$ 47,120 $ 42,826 $ 33,834 $ 38,239 $ 44,935 $ 47,431 $ 47,154 $ 38,102

(b) Includes a special dividend of $.625 per share that was paid during the second quarter of fiscal 2005.

(c) Includes $2.6 million of business repositioning charges, net of gains on plant sales, primarily in Electronic Systems and Aerostar.

(d) Includes the $3.1 million pretax gain ($1.4 million net of tax) on the sale of the company’s Plastic Tank Division.

(e) Includes the $1.2 million pretax gain ($764,000 net of tax) on the sale of assets of the company’s Glasstite subsidiary.

(f) Includes the $1.8 million pretax gain ($1.2 million net of tax) on the sale of an investment in an affiliate.

18

BUSINESS SEGMENTS

FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005 2004 2003 2002ENGINEERED FILMS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,082 $ 82,794 $ 58,657 $ 42,636 $ 35,096 $ 35,796Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 23,440 19,907 15,739 10,563 10,030 8,257Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,988 33,512 25,181 15,941 17,244 13,691Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 13,266 7,359 3,960 712 4,080 3,178Depreciation&amortization . . . . . . . . . . . . . . . . 2,887 2,436 1,403 1,611 1,475 1,001

FLOW CONTROLS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,515 $ 47,506 $ 40,726 $ 35,059 $ 28,496 $ 23,178Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 10,111 13,586 10,516(b) 8,254 6,897 5,509(d)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,629 30,047 23,701 19,304 21,483 20,313Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 577 938 1,372 341 729 677Depreciation&amortization . . . . . . . . . . . . . . . . 1,142 1,085 876 1,004 948 443

ELECTRONIC SYSTEMS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,278 $ 56,219 $ 47,049 $ 44,307 $ 38,589 $ 32,289Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 10,850 8,916 4,492 5,797 4,022 2,264Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,175 20,191 17,382 14,975 14,528 13,910Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 1,357 1,612 1,201 841 395 774Depreciation&amortization . . . . . . . . . . . . . . . . 1,086 871 880 850 978 1,101

AEROSTARSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,654 $ 18,009 $ 21,654 $ 20,725 $ 17,408 $ 20,755Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 707 2,133 3,609 3,092(c) 1,012 2,907(e)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,161 6,837 7,492 7,756 7,032 7,150Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 812 179 542 1,130 570 256Depreciation&amortization . . . . . . . . . . . . . . . . 375 359 389 436 374 347

REPORTABLE SEGMENTS TOTALSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086 $142,727 $119,589 $112,018Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 45,108 44,542 34,356(b) 27,706(c) 21,961 18,937(d,e)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,953 90,587 73,756 57,976 60,287 55,064Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 16,012 10,088 7,075 3,024 5,774 4,885Depreciation&amortization . . . . . . . . . . . . . . . . 5,490 4,751 3,548 3,901 3,775 2,892

CORPORATE & OTHER(a)

Salesfromsoldbusinesses . . . . . . . . . . . . . . . . . . $ — $ — $ — $ — $ 1,314 $ 6,497Operatingincome(loss)fromsoldbusinesses . . . — (79) — (355) 204 (613)Operating(loss)fromadministrativeexpenses . . (6,806) (7,179) (6,494) (5,725) (5,100) (5,149)Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,811 15,570 14,753 21,532 12,529 12,772Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 510 270 466 306 259 209Depreciation&amortization . . . . . . . . . . . . . . . . 395 400 293 244 191 253

TOTAL COMPANYSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086 $142,727 $120,903 $118,515Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . 38,302 37,284 27,862(b) 21,626(c) 17,065 13,175(d,e)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,764 106,157 88,509 79,508 72,816 67,836Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . 16,522 10,358 7,541 3,330 6,033 5,094Depreciation&amortization . . . . . . . . . . . . . . . . 5,885 5,151 3,841 4,145 3,966 3,145(a) Operating income from sold businesses includes administrative expenses directly attributable to the sold businesses. Assets are principally cash, investments, deferred taxes

and notes receivable.

(b) Includes a $1.3 million pretax writeoff of assets related to the Fluent Systems product line (see Note 5).

(c) Includes $182,000 of pretax gain on plant sale.

(d) Includes a $550,000 in-process research and development charge related to the Starlink acquisition.

(e) Includes $414,000 of pretax gain on plant sale.


RESULTS OF OPERATIONSThe following table presents comparative financial performance for the past three years: For the years ended January 31 2007 2006 2005Dollars in thousands, % % % % % % except per-share data Sales Change Sales Change Sales ChangeNet sales . . . . . . . . . . . . . . . . . . . . . $217,529 100.0 +6.4 $204,528 100 .0 +21 .7 $168,086 100 .0 +17 .8Gross profit . . . . . . . . . . . . . . . . . . . 54,882 25.2 +3.1 53,231 26 .0 +23 .2 43,200 25 .7 +28 .0Operating expenses . . . . . . . . . . . . . 16,580 7.6 +4.5 15,868 7 .8 +12 .9 14,056 8 .4 +17 .5Loss on disposition of businesses & assets . . . . . . . . . . . — 79 1,282Operating income . . . . . . . . . . . . . . 38,302 17.6 +2.7 37,284 18 .2 +33 .8 27,862 16 .6 +28 .8Income before income taxes . . . . . . 38,835 17.9 +3.6 37,494 18 .3 +34 .1 27,955 16 .6 +28 .7Income taxes . . . . . . . . . . . . . . . . . . 13,394 6.2 +1.2 13,232 6 .5 +31 .5 10,064 6 .0 +27 .7Net income . . . . . . . . . . . . . . . . . . . $ 25,441 11.7 +4.9 $ 24,262 11 .9 +35 .6 $ 17,891 10 .6 +29 .3Net income per share – diluted . . . . $ 1.39 +5.3 $ 1 .32 +36 .1 $ 0 .97 +29 .3Effective income tax rate . . . . . . . . . 34.5% –2.3 35 .3% – 1 .9 36 .0% – 0 .8

EXECUTIVE SUMMARYRaven Industries, Inc . is an industrial manufacturer providing a variety of products to customers in the industrial, agricultural, construction and military/aerospace markets, primarily in North America . It operates in four business segments: Engineered Films, Flow Controls, Electronic Systems and Aerostar .

Consolidated Operating ResultsThe company delivered record sales and profits in fiscal 2007, although growth rates for the current fiscal year were not as high as in the past . Net income climbed to $25 .4 million, an increase of $1 .2 million, or 4 .9%, over last year’s $24 .3 million . Earnings per diluted share increased 7 cents over the prior year, reaching $1 .39 . Fiscal year net sales climbed to $217 .5 million, exceeding fiscal 2006 by $13 .0 million, or 6 .4% . Engineered Films and Electronic Systems posted record sales for the current year, which drove the company’s profit growth .

In fiscal 2007, Raven’s quarterly dividend increased to 9 cents per share, up from 7 cents per share during fiscal 2006 . Fiscal 2007 capital spending was $16 .5 million . In the past two years, the company has made significant capital investments in its Engineered Films segment . In fiscal 2007, this investment totaled $13 .3 million . In fiscal 2006, total company-wide capital expenditures were $10 .4 million, of which $7 .4 million related to Engineered Films . Raven completed the strategic acquisition of Montgomery Industries, Inc . in its Flow Controls segment at the beginning of fiscal 2006 . The company expects that capital spending will fall back to a more normal level in fiscal 2008, with capital investment in the $6 million range .

Management expects another year of record sales and profits in fiscal 2008 . A strong turnaround from the company’s Aerostar segment is expected, as parachutes are delivered under a new contract . Flow Controls is also anticipating a rebound in fiscal 2008 as new products are delivered into an improving farm economy . While the additional Engineered Films manufacturing capabilities and capacity are expected to create new opportunities, management believes the lack of disaster film demand combined with higher depreciation charges will reduce its operating income in fiscal 2008 . Electronic Systems is expecting growth from its existing customer base .

The following discussion highlights the consolidated operating results . Operating results are more fully explained in the segment discussions that follow .

FINANCIAL REVIEW AND ANALYSIS

20

Fiscal 2007 versus fiscal 2006Net sales for the fiscal year ended January 31, 2007, of $217 .5 million represented a record for the company, exceeding the prior year by $13 .0 million, or 6 .4% . The fiscal 2007 sales performance followed a strong fiscal 2006, which recorded a 21 .7% increase over fiscal 2005 sales . Engineered Films and Electronic Systems posted record net sales for the fiscal year ended January 31, 2007, while Flow Controls and Aerostar fell short of the previous year’s revenue levels . Engineered Films net sales reached $91 .1 million, an increase of $8 .3 million compared with the prior fiscal year . Increased demand for pit liners used in oil and gas fields, along with an improvement in construction film sales, led to the 10 .0% revenue rise for Engineered Films . This growth was tempered by a decrease in sales of film to the manufactured housing industry and lower disaster film revenue versus one year earlier . Electronic Systems net sales climbed to $66 .3 million, which reflected a 17 .9%, or $10 .1 million, increase over fiscal 2006 . Higher product demand from the segment’s largest customer accounted for most of the current year’s revenue increase . Fiscal 2007 Flow Controls net sales of $45 .5 million were behind the prior year by $2 .0 million, or 4 .2% . A weaker agricultural economy, which caused customers to delay equipment buying decisions, contributed to the lack of sales growth in this segment . Aerostar net sales of $14 .7 million represented a $3 .4 million, or 18 .6%, decrease from one year ago, due mainly to lower parachute product deliveries .

Fiscal 2007 operating income of $38 .3 million increased $1 .0 million, or 2 .7%, compared with $37 .3 million reported for fiscal 2006, due to strong performances from Engineered Films and Electronic Systems . Operating income growth in these two segments was partially offset by lower operating income levels for Flow Controls and Aerostar . Engineered Films improved operating income by $3 .5 million, or 17 .7%, as a result of higher sales and favorable raw material pricing . Increased sales and better operational execution on existing customer contracts accounted for the rise in Electronic Systems operating income, which grew $1 .9 million, or 21 .7%, reaching $10 .9 million for the 12-month period . Flow Controls fiscal 2007 operating income of $10 .1 million represented a decrease of $3 .5 million, or 25 .6%, in contrast to one year earlier . Lower sales volume on relatively fixed costs had a negative impact on this segment’s profit for the year . Aerostar reported operating income of $707,000 for the latest year, decreasing $1 .4 million, or 66 .9%, from the prior year, mostly due to the lack of parachute product shipments .

Fiscal 2006 versus fiscal 2005Fiscal 2006 net sales reached $204 .5 million, 21 .7% higher than fiscal 2005, with Engineered Films, Flow Controls, and Electronic Systems recording increases over their fiscal 2005 performance . Engineered Films posted the largest sales gain: $24 .1 million or 41 .1%, to reach $82 .8 million . Fiscal 2006 revenue topped the prior year in all of the Engineered Films markets, reflecting the segment’s additional manufacturing capacity, strong demand for pit liners, and higher selling prices due to increased resin costs . Flow Controls net sales reached $47 .5 million, up 16 .6% over fiscal 2005 . Increased demand for the segment’s standard sprayer control systems and sales of automatic boom height control systems (Autoboom™) boosted revenue for fiscal 2006 . Electronic Systems reported a 19 .5% increase in annual sales resulting from higher demand from its existing customer base . Aerostar net sales of $18 .0 million fell short of fiscal 2005 by $3 .6 million, resulting from an expected cargo parachute revenue decrease and lower uniform contract sales .

Operating income of $37 .3 million was 33 .8% over the $27 .9 million reported for fiscal 2005 . Improved profits were the result of higher sales from Engineered Films and Flow Controls, and increased manufacturing efficiencies in Electronic Systems . Fiscal 2006 operating income of $19 .9 million reported in the Engineered Films segment increased $4 .2 million . Fiscal 2006 Flow Controls operating income of $13 .6 million was $3 .1 million, or 29 .2% higher than fiscal 2005, while Electronic Systems operating income of $8 .9 million almost doubled from the previous year . Aerostar operating income of $2 .1 million fell short of fiscal 2005 by $1 .5 million, or 40 .9%, and reflected the segment’s lack of a follow-on military parachute order in fiscal 2006 .

FINANCIAL REVIEW AND ANALYSIS (continued)


FISCAL 2007 PERFORMANCE MEASURESRaven has set goals for achieving higher growth, better returns on invested capital, and increased shareholder value . Fiscal 2007 performance measures fell below the outstanding fiscal 2006 financial returns . Net income was 11 .7% of net sales in fiscal 2007, slightly below fiscal 2006’s record of 11 .9% . Net income as a percent of average assets was 22 .5% as compared to 24 .9% in fiscal 2006 . As a percent of beginning equity, fiscal 2007 net income was 30 .1%, down from fiscal 2006’s 36 .7% . 2007 2006 2005 2004 2003 2002Net income as % of Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.7% 11 .9% 10 .6% 9 .7% 9 .3% 7 .5% Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.5% 24 .9% 21 .3% 18 .2% 15 .9% 13 .3% Beginning equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1% 36 .7% 26 .9% 23 .8% 21 .5% 18 .4%

SEGMENT ANALYSISNET SALES AND OPERATING INCOME BY SEGMENT 2007 2006 2005 % % % Dollars in thousands amount change amount change amount changeNET SALESEngineered Films . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,082 +10.0 $ 82,794 +41 .1 $ 58,657 +37 .6Flow Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,515 – 4.2 47,506 +16 .6 40,726 +16 .2Electronic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 66,278 +17.9 56,219 +19 .5 47,049 + 6 .2Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,654 –18.6 18,009 –16 .8 21,654 + 4 .5Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 + 6.4 $204,528 +21 .7 $168,086 +17 .8

2007 2006 2005 % % % Dollars in thousands amount sales amount sales amount salesOPERATING INCOME (LOSS)Engineered Films . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,440 25.7 $ 19,907 24 .0 $ 15,739 26 .8Flow Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,111 22.2 13,586 28 .6 10,516 25 .8Electronic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 10,850 16.4 8,916 15 .9 4,492 9 .5Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707 4.8 2,133 11 .8 3,609 16 .7Sold businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (79) — Corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . (6,806) (7,179) (6,494)Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,302 17.6 $ 37,284 18 .2 $ 27,862 16 .6

ENGINEERED FILMSEngineered Films produces rugged reinforced plastic sheeting for industrial, construction, manufactured housing and agriculture applications .

Fiscal 2007 versus fiscal 2006Fiscal 2007 net sales of $91 .1 million grew 10 .0%, or $8 .3 million, from the prior record in fiscal 2006 of $82 .8 million . Sales of pit lining and construction films posted significant revenue growth for the current year . Pit lining sales benefited from strong oil and gas drilling activity, while construction film revenues increased due to market-share growth . The growth in these two markets was partially offset by decreased sales activity in the manufactured housing and disaster film markets . Disaster film sales in the current year totaled $9 .9 million versus $11 .4 million a year ago . A portion of the higher Engineered Films sales level was due to selling price increases . The amount of sales attributable to higher product pricing (and not due to an increase in volume) was estimated to be about 8% of total fiscal 2007 reported sales . Fiscal 2007 fourth quarter sales of $19 .7 million fell below the prior year’s fourth-quarter mark, decreasing $6 .3 million, or 24 .2% . Disaster film sales accounted for the shortfall, with $6 .3 million of deliveries made in last year’s fourth quarter compared with no shipments occurring in this year’s fourth quarter .

ENGINEERED FILMS OperatingNet Sales Income(dollars in millions) (dollars in millions)

2005 2006 2007 2005 2006 2007

$58.7

$82.8

$91.1

$15.7

$19.9

$23.4

22

Fiscal 2007 operating income reached a record $23 .4 million, up $3 .5 million, or 17 .7%, due to higher sales . Favorable resin costs also contributed to the profit growth, resulting in an increase in the segment’s gross profit rate . Gross profit as a percentage of net sales increased from 27 .6% reported one year ago to 29 .4% for the year ended January 31, 2007 . Increased selling expenses, which rose $365,000, or 12 .6%, partially offset the profit impact of the segment’s higher sales level and favorable material costs . Fiscal 2007 selling expenses exceeded the prior year’s, because of higher personnel costs and an increased trade show presence to support the segment’s expanded product offerings and manufacturing capabilities .

Fiscal 2006 versus fiscal 2005Fiscal 2006 revenues of $82 .8 million reflected an increase of 41 .1% over fiscal 2005 . All of Engineered Films market segments achieved higher sales in fiscal 2006, with the pit lining segment posting the largest revenue growth . Engineered Films also reported significant sales growth in its agricultural, industrial and construction markets . Fiscal 2006 disaster film sales of $11 .4 million were $2 .0 million, or 21 .6% higher than fiscal 2005 . Additional manufacturing capacity brought online during the latter part of fiscal 2005 and the beginning of fiscal 2006 enabled the segment to fulfill higher customer demand . Increased product pricing from higher raw material prices also positively affected overall sales for fiscal 2006 . The increase in the segment’s fiscal 2006 sales resulting from higher product pricing due to increased resin costs was estimated to be 12-16% .

Fiscal 2006 operating income climbed to $19 .9 million, increasing 26 .5% over the prior year . The positive profit impact of the higher sales level was partially offset by higher resin costs, as reflected in the decrease in gross profit as a percent of net sales to 27 .6% for fiscal 2006 versus 31 .4% in fiscal 2005 . Selling expenses rose 10 .5% during fiscal 2006, reaching $2 .9 million, mainly due to increased personnel costs to support the segment’s higher sales .

ProspectsThe company invested $13 .3 million in property, plant and equipment for Engineered Films in fiscal 2007 . Management believes that investments in extrusion capacity will allow this segment to expand its product offerings and open new markets . However, most of the new capacity was not yet operational at the beginning of fiscal 2008 . Historically, it takes two-to-three years to fully utilize new extrusion capacity . No significant disaster film sales are expected in fiscal 2008 in contrast to $9 .9 million shipped in the first three quarters of fiscal 2007 . Sales growth of 5-10% in fiscal 2008 is expected to be driven by new products and occur primarily in the fourth quarter . Profits are expected to be lowered by new product introduction costs and approximately $1 .6 million of additional depreciation charges . Additional disaster film sales could improve the current outlook .

FLOW CONTROLSFlow Controls, including Raven Canada and Raven GmbH (Europe), provides electronic and Global Positioning System (GPS) products for precision agriculture, marine navigation and other niche markets .

Fiscal 2007 versus fiscal 2006Net sales in fiscal 2007 were $45 .5 million, decreasing $2 .0 million, or 4 .2%, from the prior year . An increase in new precision product sales was offset by a decline in shipments of standard sprayer control systems . Sales of these systems decreased due to the prior year’s high level of product deliveries, which resulted from concern over a potential Asian rust infestation in North America . Softness in the U .S . agricultural economy caused customers to take a more conservative approach when making investments, delaying demand for the segment’s products . Weakness in global markets, especially in South America and Australia, prevented Flow Controls international growth initiatives from producing higher revenues . Revenue growth was also hampered by GPS-based agriculture product reliability issues, which were recognized and resolved during fiscal 2007 .



Fiscal 2007 operating income of $10 .1 million fell short of last year’s $13 .6 million by $3 .5 million, or 25 .6% . As a percentage of sales, gross profit declined to 32 .1% versus 37 .0% for fiscal 2006 . Lower sales volume on fixed costs,

increased product warranty expense, and higher selling expenses negatively affected operating income for the current fiscal year . Fiscal 2007 selling expenses were $4 .5 million, up from the prior year’s $3 .9 million by $630,000, or 16 .1% . Flow Controls concentrated its sales and marketing efforts this year on international markets . Cost controls put into place in relation to the segment’s domestic selling group were offset by increased selling efforts in Canada and Europe . Fiscal 2007 fourth quarter operating income of $2 .1 million was $594,000, or 22 .4%, lower than the quarter ended one year earlier, despite a slightly higher sales level . Fourth quarter operating income for the latest year was negatively affected by relatively lower margins on precision agriculture products and higher warranty costs . This impact was reflected in the decrease in gross profit as a percentage of net sales, which fell from 37 .1% reported for last year’s fourth quarter to 29 .9% for the just-ended three months .

Fiscal 2006 versus fiscal 2005Fiscal 2006 net sales reached $47 .5 million, up 16 .6%, or $6 .8 million, over fiscal 2005 levels . The segment’s standard sprayer control systems and the acquired Autoboom™ product line accounted for the majority of the sales growth .

Gross profit as a percentage of sales improved slightly to 37 .0% from the 36 .7% reported for the prior year, reflecting the impact of increased sales on fixed costs . Fiscal 2006 operating income of $13 .6 million grew 29 .2% compared with the year ended January 31, 2005 . Included in fiscal 2005 operating income was a $1 .3 million pretax writeoff of assets related to the segment’s Fluent Systems

acquisition . Excluding the writeoff, fiscal 2006 operating income would have increased $1 .8 million, or 15 .2%, reflecting the segment’s higher sales, tempered by increases in product development and distribution investments . Fiscal 2006 selling expenses were $3 .9 million, a 25 .1% increase over fiscal 2005 . Higher selling expenses related to the segment’s U .S . distribution plan, and expenses incurred to leverage Flow Controls product offerings in Canada, contributed to the fiscal 2006 selling expense increase .

ProspectsManagement expects sales growth in the coming year as product introductions gain acceptance and the recent improvement in the agricultural economy takes hold and begins to influence customer-buying decisions . Management also believes its past investments in reaching the Canadian and European markets will aid revenue growth next year . The segment is poised to increase its investments in Australia and Brazil if, or when, those economies show signs of improvement . Sales growth in fiscal 2008 is expected to be tempered by more intense competition for the segment’s GPS product offerings within the agricultural market . Fiscal 2008 sales growth for Flow Controls is targeted to reach the 10-15% range . Margins are expected to recover somewhat, as the segment’s new products are performing well, but competitive pricing pressure is expected to restrain margin growth .

FLOW CONTROLS OperatingNet Sales Income(dollars in millions) (dollars in millions)

2005 2006 2007 2005 2006 2007

$40.7

$47.5$45.5

$10.5

$13.6

$10.1

24

ELECTRONIC SYSTEMSElectronic Systems is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers .

Fiscal 2007 versus fiscal 2006In fiscal 2007, Electronic Systems posted a record $66 .3 million of net sales, reflecting a $10 .1 million, or 17 .9%, increase over fiscal 2006 . Net sales for the fourth quarter of the current year of $17 .0 million represented a $3 .1 million improvement from the quarter ended one year earlier . Sales to existing customers accounted for substantially all of the growth in fiscal 2007, with most of the sales increase due to a higher level of deliveries to the segment’s largest customer .

Operating income for Electronic Systems reached $10 .9 million for fiscal 2007, improving $1 .9 million, or 21 .7%, over fiscal 2006 . Fourth quarter operating income of $2 .9 million beat last year’s fourth quarter results by $928,000, or 46 .4% . Better execution on existing contracts and increased sales accounted for the improvements in operating income for both periods . As a percentage of net sales, gross profit in the latest year increased to 18 .0% compared with 17 .4% for fiscal 2006, and reflected the operational gains made during the year . Higher personnel costs contributed to the 24 .4% increase in selling expenses, which totaled $1 .1 million for fiscal 2007 .

Fiscal 2006 versus fiscal 2005Electronic Systems increased sales 19 .5%, or $9 .2 million, over fiscal 2005 to reach $56 .2 million . Fiscal 2006 sales growth came from higher deliveries to long-term customers on existing contracts . Fiscal 2006 operating income of $8 .9 million almost doubled from the prior year, reflecting increased sales and better operational execution on current contracts, in contrast to fiscal 2005’s start-up inefficiencies and customer-driven delays . As a percentage of sales, the gross profit rate climbed to 17 .4% compared with fiscal 2005’s 11 .3% . Fiscal 2006 selling expenses of $885,000 were up 7 .5% versus fiscal 2005 .

ProspectsElectronic Systems is expected to improve sales by 10-15% in fiscal 2008 . An anticipated increase in sales to the segment’s existing customers should drive the revenue growth in the upcoming fiscal year . Electronic Systems will continue to strive for a high level of operational execution to maintain its gross profit rates in the coming year .

AEROSTARThe Aerostar segment manufactures military parachutes, government service uniforms, custom-shaped inflatable products, and high-altitude balloons for public and commercial research .

Fiscal 2007 versus fiscal 2006Fiscal 2007 net sales of $14 .7 million decreased $3 .4 million, or 18 .6%, from fiscal 2006 . This was primarily due to lower parachute product deliveries, with a decrease in research balloon revenue also creating a sales shortfall compared with the previous year . Partially offsetting these decreases were higher sales of commercial inflatable products during fiscal 2007 .

Operating income for the fiscal year of $707,000 was down $1 .4 million from fiscal 2006 . Increased profits on commercial inflatable products due to higher sales, and the profit impact of a favorable product mix in contract uniform manufacturing, were offset by the lack of parachute product business and lower research balloon profits . The fiscal 2007 gross profit as a percentage of net sales fell 6 .5 percentage points, decreasing to 10 .4%, because of under-utilized plant capacity . Current year selling expenses of $822,000 decreased $88,000, or 10%, as cost controls were put into place at the beginning of the fiscal year . Fiscal 2007 fourth quarter operating income rebounded for the first time during the year, with $638,000 of operating income in contrast to a fourth quarter loss of $29,000 incurred one year earlier . Favorable profit comparisons were generated in the research balloon, commercial inflatable products, and contract uniform product lines for the quarter ended January 31, 2007 . These fourth quarter increases were tempered by parachute start-up losses incurred on the segment’s new military parachute contract, which will begin deliveries in fiscal 2008 .


ELECTRONIC SYSTEMS OperatingNet Sales Income(dollars in millions) (dollars in millions)

2005 2006 2007 2005 2006 2007

$47.0

$56.2

$66.3

$4.5

$8.9

$10.9


Fiscal 2006 versus fiscal 2005Aerostar net sales of $18 .0 million in fiscal 2006 were down from the fiscal 2005’s $21 .7 million, with the majority of the decrease due to lower military parachute shipments . New government contracts for parachute products were not obtained in fiscal 2006 . Partially offsetting the decline in parachute sales and lower contract uniform deliveries was an increase in research balloon revenue . For the full year, operating income of $2 .1 million was $1 .5 million behind the prior fiscal year . An increase in research balloon profits due to higher sales was offset by lower parachute product and uniform contract profits . As a percentage of sales, gross profits decreased from 21 .1% for fiscal 2005 to 16 .9% in fiscal 2006 . Selling expenses of $910,000 were down slightly in fiscal 2006, decreasing $40,000 from the prior year .

ProspectsManagement expects fiscal 2008 to be a turnaround year for Aerostar, with sales and profits benefiting from the $6 .7 million military parachute contract received in fiscal 2007 . Deliveries on the new contract are anticipated to begin and be completed during fiscal 2008 . Start-up costs under the contract could negatively affect margins early in the year . Revenue growth will also depend on obtaining additional contract uniform and research balloon business . Aerostar sales in the upcoming fiscal year are targeted to increase approximately 50%, due mainly to the increase in parachute revenues . Management believes Aerostar operating margin can reach the 15% range for the full year .

EXPENSES, INCOME TAXES AND OTHERCorporate expenses of $6 .8 million decreased $373,000, or 5 .2%, from fiscal 2006 . Corporate giving, which was at a high level in fiscal 2006, was reduced in the current fiscal year, and management incentive costs were also lower . Corporate expenses, as a percentage of net sales, have steadily decreased, ranging from 3 .1%, 3 .5%, and 3 .9% for fiscal years 2007, 2006, and 2005, respectively . Fiscal 2008 corporate expenses are expected to rise approximately 10% due primarily to higher compensation expense .

Raven had no outstanding debt as of January 31, 2007 . Fiscal 2007 interest expense of $2,000 improved from $35,000 reported in fiscal 2006 . Seasonal short-term borrowings of $4 .5 million were required during the first quarter of fiscal 2006, but were repaid by April 30, 2005 . No short-term borrowings were made in fiscal 2007 . Other income of $535,000 in fiscal

2007 grew from $245,000 in fiscal 2006 . The main component of other income is interest income, which rose in fiscal 2007 due to higher cash balances and an increase in interest rates received on the company’s cash and short-term investments . Fiscal 2007’s effective income tax rate of 34 .5% decreased from fiscal 2006’s effective rate of 35 .3% and was lower than the fiscal 2005 rate of 36 .0% . This reflected the impact of the U .S . federal tax deduction for income attributable to manufacturing activities, and an increase in the company’s research and development tax credit . The effective tax rate in fiscal 2008 is expected to remain consistent with fiscal 2007, depending on the effects of adopting FASB Interpretation 48, Accounting for Uncertain Tax Positions, or a change in current tax law .

AEROSTAR OperatingNet Sales Income(dollars in millions) (dollars in millions)

2005 2006 2007 2005 2006 2007

$21.7

$18.0

$14.7

$3.6

$2.1

$0.7

NET OPERATING MARGIN(percent)

02 03 04 05 06 07

11.1%

14.1%15.2%

16.6%18.2%17.6%

26


LIQUIDITY AND CAPITAL RESOURCESThe following table summarizes cash provided by (used in) the company’s business activities for the past three fiscal years:Dollars in thousands 2007 2006 2005Operating activities . . . . . . . . . . . . . . . . $26,313 $21,189 $18,871Investing activities . . . . . . . . . . . . . . . . . (18,664) (11,435) (7,631)Financing activities . . . . . . . . . . . . . . . . (10,277) (6,946) (19,063)

OPERATING ACTIVITIES AND CASH POSITIONRaven’s cash flow from operations of $66 .4 million over the past three years compared with net income of $67 .6 million over the same period . Net cash provided by operating activities in fiscal 2007 totaled $26 .3 million, a $5 .1 million increase compared with operating cash inflows in fiscal 2006 . As growth slowed this past fiscal year, the amount of incremental cash required to support working capital requirements decreased . Cash consumed to finance accounts receivable and inventory balances for the year ended January 31, 2007, was $2 .4 million versus cash used of $8 .2 million during fiscal 2006 . Partially offsetting this favorable effect on the current year’s cash provided by operating activities was additional cash consumed to settle the prior year’s accrued liability balances . Accrued liabilities at the end of fiscal 2007 decreased $1 .6 million from one year earlier, mainly because of lower accrued employee incentive and profit sharing balances . Net cash provided by operating activities in fiscal 2006 totaled $21 .2 million, a $2 .3 million increase from operating cash inflows of $18 .9 million in fiscal 2005 . The cash impact of the company’s strong fiscal 2006 earnings performance and higher accrued liabilities at fiscal 2006 year-end were tempered by higher accounts receivable and inventory levels and a lower accounts payable balance .

Cash, cash equivalents and short-term investments totaled $10 .8 million at January 31, 2007, down $626,000 from one year earlier . Raven’s strong operating cash inflows were consumed in the current year by a high level of capital investment in Engineered Films for additional manufacturing equipment and facilities, and an increase in equity returned to the shareholders in the form of cash dividends and stock repurchases . Management expects that cash and short-term investments, combined with continued positive operating cash flows, will continue to be enough to fund day-to-day operations . The company utilized its short-term credit facility to fund the Flow Controls’ Canadian acquisition in February 2005 and to help with short-term seasonal cash needs during the first quarter of fiscal 2006 . All of these short-term borrowings were repaid by April 30, 2005 .

INVESTING ACTIVITIESNet cash used in investing activities in fiscal 2007 totaled $18 .7 million versus $11 .4 million in fiscal 2006 . Fiscal 2007 capital expenditures of $16 .5 million rose $6 .2 million from fiscal 2006, with $13 .3 million being invested in Engineered Films for additional manufacturing capacity and facilities . Fiscal 2007 investing activities also included placing an additional $2 .0 million of cash into short-term investments to guarantee a certain rate of return . Net cash used in investing activities in fiscal 2006 totaled $11 .4 million, up from $7 .6 million in fiscal 2005 . Fiscal 2006 capital expenditures of $10 .4 million rose $2 .8 million from fiscal 2005 and included $7 .4 million of investment in Engineered Films . In February 2005, Raven acquired substantially all of the assets of Montgomery Industries, Inc . for $2 .7 million in cash . A $650,000 investment in an unconsolidated real estate affiliate was sold in fiscal 2006, resulting in no material gain or loss on the sale, and $1 .0 million of short-term investments were liquidated .

CASH FLOWS FROM OPERATIONS(dollars in millions)

02 03 04 05 06 07

$18.5

$12.7

$19.7 $18.9$21.2

$26.3


FINANCING ACTIVITIESNet cash used in financing activities in fiscal 2007 of $10 .3 million increased $3 .3 million from the $6 .9 million used in fiscal 2006 . The company’s main financing activities continue to be the payment of dividends and the repurchase of company stock . Raven increased its quarterly dividend on a per-share basis for the 20th consecutive year . Fiscal 2007 quarterly dividend payments of 9 cents per share increased 28 .6% from the prior year . Treasury shares purchased during fiscal 2007 totaled $4 .2 million, with 146,247 shares bought at an average share price of $28 .72 . Net cash used in financing activities in fiscal 2006 of $6 .9 million decreased $12 .1 million from the $19 .1 million used in fiscal 2005 . The decline was due primarily to the $11 .3 million special dividend paid in fiscal 2005 . In fiscal 2006, 67,800 treasury share purchases were made at an average price of $24 .91, while 186,500 treasury shares were purchased in fiscal 2005 at an average price of $18 .87 .

No short-term borrowings were required during fiscal 2007 . Short-term borrowings on the company’s line of credit facility totaled $4 .5 million in fiscal 2006 . These borrowings were used for seasonal cash needs and to fund the Montgomery Industries, Inc . acquisition, and were repaid by April 30, 2005 .

Contractual obligations consist of non-cancelable operating leases for facilities and equipment, and unconditional purchase obligations primarily for raw materials . Letters of credit have been issued for workers’ compensation insurance obligations that remain from the period of self-insurance (February 1, 2001 and prior) . In the event the bank chooses not to renew the company’s line of credit, the letters of credit would cease and alternative methods of support for the insurance obligations would be necessary, would be more expensive, and require additional cash outlays . Management believes the chances of this are remote . A summary of the obligations and commitments at January 31, 2007, and for the next five years is shown below . FY 2009- FY 2011- Dollars in thousands Total FY 2008 FY 2010 FY 2012Contractual Obligations:Line of Credit(a) . . . . . . . . . . . . . . . . . . $ — $ — $ — $ —Operating leases . . . . . . . . . . . . . . . . . 305 235 70 —Unconditional purchase obligations . . . 26,329 26,329 — —

26,634 26,564 70 —Other Commercial Commitments:Letters of credit . . . . . . . . . . . . . . . . . . 1,356 1,356 — —

$27,990 $27,920 $ 70 $ —

(a) $8.0 million line bears interest at 8.00% as of January 31, 2007, and expires August 2007. The line of credit is reduced by outstanding letters of credit.

CAPITAL REQUIREMENTSRaven maintains an excellent financial condition and capacity for growth . Management continues to look for opportunities to expand its core businesses through acquisitions or internal growth . The company has the capacity to assume additional financing and will do so if the appropriate strategic opportunity presents itself . Capital expenditures for fiscal 2008 are expected to be in the $6 million range in contrast to the $16 .5 million spent in fiscal 2007 . The company intends to return approximately 30% of its earnings to shareholders in the form of dividends . Stock repurchases are anticipated to continue as a means to return additional cash to shareholders and increase balance sheet leverage . Cash generated from operations and the availability of cash under existing credit facilities should be sufficient to fund these initiatives .

28

CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDSCRITICAL ACCOUNTING POLICIESCritical accounting policies are those that require the application of judgment when valuing assets and liabilities on the company’s balance sheet . These policies are discussed below, because a fluctuation in actual results versus expected results could materially affect Raven’s operating results, and because the policies require significant judgments and estimates to be made . Accounting related to these policies is initially based on best estimates at the time of original entry in the accounting records . Adjustments are periodically recorded when the company’s actual experience differs from the expected experience underlying the estimates . These adjustments could be material if experience were to change significantly in a short period of time . Raven uses derivative financial instruments to manage the economic impact of fluctuations in currency exchange rates on transactions that are denominated in currency other than its functional currency, which is the U .S . dollar . Using these financial instruments has no material effect on the company’s financial condition, results of operations, or cash flows . Raven does not enter into derivatives for trading or speculative purposes .

InventoriesRaven’s most significant accounting judgment is determining inventory value at the lower of cost or market . The company estimates inventory valuation on a quarterly basis . Typically, when a product reaches the end of its life cycle, inventory value declines slowly or the product has alternative uses . Management uses its manufacturing resources planning data to help determine if inventory is slow-moving or has become obsolete due to an engineering change . The company closely reviews items that have balances in excess of the prior year’s requirements or that have been dropped from production requirements . Despite these reviews, technological or strategic decisions, made by management or the company’s customers, may result in unexpected excess material . In Electronic Systems, the company typically has recourse to customers for obsolete or excess material . When Electronic Systems customers authorize inventory purchases, especially with long lead-time items, they are required to take delivery of unused material or compensate the company accordingly . In every operating unit of the company, management must manage obsolete inventory risk . The accounting judgment ultimately made is an evaluation of the success that management will have in controlling inventory risk and mitigating the impact of obsolescence when it does occur .

WarrantyEstimated warranty liability costs are based on historical warranty costs and average time elapsed between purchases and returns for each business segment . Warranty issues that are unusual in nature are accrued for individually .

Allowance for Doubtful AccountsDetermining the level of the allowance for doubtful accounts requires management’s best estimate of the amount of probable credit losses based on historical writeoff experience by segment, and an estimate of the collectibility of any known problem accounts . Factors that are considered beyond historical experience include the length of time the receivables are outstanding, the current business climate, and the customer’s current financial condition .

Revenue RecognitionThe company recognizes and records revenue when shipment has occurred because there is persuasive evidence of an arrangement, the sales price is determinable, collectibility is reasonably assured, and sales terms are FOB shipping point . Estimated returns, sales allowances or warranty charges are recognized upon shipment of a product . The company sells directly to customers or distributors that incur the expense and commitment for any post-sale obligations beyond stated warranty terms .

RETURN ON AVERAGE ASSETS(percent)

02 03 04 05 06 07

13.3%

15.9%18.2%

21.3%

24.9%22.5%



BOOK VALUE PER SHARE(dollars)

02 03 04 05 06 07

$2.82$3.21

$3.68 $3.67

$4.67

$5.45

Self-insurance ReservesRaven purchases insurance with deductibles for product liability; general insurance, including aviation product liability; and worker’s compensation . Third-party insurance is carried for what is believed to be the major portion of potential exposure . The company has established accruals for potential uninsured claims, including estimated costs and legal fees . Management considers these accruals adequate, although a substantial change in the number and/or severity of claims would result in materially different amounts .

Goodwill and Long-lived AssetsManagement periodically assesses goodwill and other long-lived assets for impairment, or more frequently if events or changes in circumstances indicate that an asset might be impaired, using fair value measurement techniques . For goodwill, the company performs impairment reviews annually by reporting units, which are the company’s reportable segments . The one exception is Aerostar’s high-altitude research balloon operation, which is evaluated independently from Aerostar’s other operations . Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions . These valuation methodologies use significant estimates and assumptions, which include projected future cash flows, including timing and the risks inherent in future cash flows, perpetual growth rates, and determination of appropriate market comparables .

The company periodically reviews and evaluates the depreciable lives of its long-lived assets . During fiscal 2007, management reviewed the depreciable life of its extrusion equipment in Engineered Films . Management concluded that new extrusion equipment should be depreciated over 12 years to reflect the enhanced technology, flexibility, and production capabilities of this equipment . Extrusion equipment placed in service prior to fiscal 2007 will continue to be depreciated over 7 years .

NEW ACCOUNTING STANDARDSIn September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, Fair Value Measurement. The standard provides guidance for using fair value to measure assets and liabilities . SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions . Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy . The statement is effective as of the beginning of the company’s 2008 fiscal year . The company does not expect the implementation of SFAS 157 to have a material impact on its consolidated results of operations, financial condition or cash flows .

In October 2006, the FASB issued FASB Interpretation No . 48, Accounting for Uncertainty in Income Taxes (FIN 48) . FIN 48 is an interpretation of FASB Statement No . 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes . In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the company’s 2008 fiscal year . The company does not expect the adoption of FIN 48 to have a significant impact on its consolidated results of operations, financial condition or cash flows .

0

1500

3000

0

10

20

30

40

50

Feb06 Mar06 Apr06 May06 Jun06 Jul06 Aug06 Sep06 Oct06 Nov06 Dec06 Jan07

SharesTraded(in thousands) ClosingStockPrice(in dollars)

Pric

e

Volu

me

30

MONTHLY CLOSING STOCK PRICE AND VOLUME

QUARTERLY INFORMATION (Unaudited) NetIncome CommonStock Cash

Dollars in thousands Net Gross Operating Pretax Net PerShare(a) MarketPrice Dividendsexcept per-share data Sales Profit Income Income Income Basic Diluted High Low PerShareFISCAL 2007First Quarter . . . . . . . . $ 58,465 $15,891 $11,477 $11,615 $ 7,502 $0.41 $0.41 $42.16 $31.22 $0.090Second Quarter . . . . . . 50,381 12,183 7,872 7,937 5,127 0.28 0.28 42.70 25.89 0.090Third Quarter . . . . . . . . 57,435 14,480 10,540 10,713 6,968 0.39 0.38 32.64 25.89 0.090Fourth Quarter . . . . . . . 51,248 12,328 8,413 8,570 5,844 0.32 0.32 35.35 25.46 0.090Total Year . . . . . . . . . . . $217,529 $54,882 $38,302 $38,835 $25,441 $1.41 $1.39 $42.70 $25.46 $0.360

FISCAL2006FirstQuarter . . . . . . . . . . $ 50,704 $15,161 $11,136 $11,098 $ 7,157 $0 .40 $0 .39 $22 .28 $16 .54 $0 .070SecondQuarter . . . . . . . 45,304 10,882 7,299 7,391 4,774 0 .26 0 .26 27 .78 18 .68 0 .070ThirdQuarter . . . . . . . . . 54,135 14,213 10,568 10,635 6,869 0 .38 0 .37 31 .99 21 .75 0 .070FourthQuarter . . . . . . . . 54,385 12,975 8,281 8,370 5,462 0 .30 0 .30 33 .15 26 .75 0 .070TotalYear . . . . . . . . . . . . $204,528 $53,231 $37,284 $37,494 $24,262 $1 .34 $1 .32 $33 .15 $16 .54 $0 .280

FISCAL2005FirstQuarter . . . . . . . . . . $ 38,408 $11,678 $ 8,451 $ 8,475 $ 5,415 $0 .30 $0 .29 $17 .17 $13 .65 $0 .055SecondQuarter . . . . . . . 37,077 8,759 5,651 5,677 3,642 0 .20 0 .20 19 .43 13 .08 0 .680(b)

ThirdQuarter . . . . . . . . . 48,597 12,962 8,099(c) 8,115(c) 5,194(c) 0 .29 0 .28 23 .89 17 .41 0 .055FourthQuarter . . . . . . . . 44,004 9,801 5,661 5,688 3,640 0 .20 0 .20 26 .94 17 .05 0 .055TotalYear . . . . . . . . . . . . $168,086 $43,200 $27,862 $27,955 $17,891 $0 .99 $0 .97 $26 .94 $13 .08 $0 .845

(a) Net income per share is computed discretely by quarter and may not add to the full year.

(b) A special dividend of $.625 per share was paid during the second quarter of fiscal 2005.

(c) Includes a pretax $1.3 million ($845,000 net of tax) writeoff of assets related to the Fluent Systems product line (see Note 5).


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

OurmanagementisresponsibleforestablishingandmaintainingeffectiveinternalcontroloverfinancialreportingasdefinedinRule13a-15(f)oftheSecuritiesExchangeActof1934 .Ourinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples .Ourinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(i)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsofourassets;(ii)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatourreceiptsandexpendituresarebeingmadeonlyinaccordancewithauthorizationsofourmanagementanddirectors;and(iii)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofourassetsthatcouldhaveamaterialeffectonthefinancialstatements .

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements .Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate .

ManagementhasassessedourinternalcontroloverfinancialreportinginrelationtocriteriadescribedinInternal Control – Integrated Framework,issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission .Basedonthisassessmentusingthosecriteria,weconcludedthat,asofJanuary31,2007,ourinternalcontroloverfinancialreportingwaseffective .

Ourmanagement’sassessmentoftheeffectivenessofourinternalcontroloverfinancialreportingasofJanuary31,2007,hasbeenauditedbyPricewaterhouseCoopersLLP,anindependentregisteredpublicaccountingfirm,asstatedintheirreport,whichappearsonpage43ofthisAnnualReport .

RonaldM .Moquist ThomasIacarellaPresident&ChiefExecutiveOfficer VicePresident&ChiefFinancialOfficer

March22,2007

32

CONSOLIDATED BALANCE SHEETS

AsofJanuary31Dollars in thousands, except share data 2007 2006 2005

ASSETSCurrentassets Cashandcashequivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,783 $ 9,409 $ 6,619 Short-terminvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 2,000 3,000 Accountsreceivable,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,336 29,290 25,370 Inventories,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,071 27,819 23,315 Deferredincometaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,761 1,746 1,465 Prepaidexpensesandothercurrentassets . . . . . . . . . . . . . . . . . . 1,268 1,081 1,823 Totalcurrentassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,219 71,345 61,592Property,plantandequipment,net . . . . . . . . . . . . . . . . . . . . . . . . . . 36,264 25,602 19,964Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,604 6,401 5,933Otherassets,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,677 2,809 1,020Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,764 $106,157 $88,509

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrentliabilities Accountspayable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,093 $ 8,179 $10,322 Accruedliabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,579 11,154 9,773 Customeradvances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 717 855 Totalcurrentliabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,464 20,050 20,950

Otherliabilities,primarilycompensationandbenefits . . . . . . . . . . . . 5,032 1,718 1,477

Commitmentsandcontingencies

Shareholders’equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,268 84,389 66,082 Commonshares,parvalue$1 .00pershare Authorized–100,000,000 Outstanding–2007:18,039,223;2006:18,072,369 2005:17,999,468Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . $119,764 $106,157 $88,509

The accompanying notes are an integral part of the consolidated financial statements.


CONSOLIDATED STATEMENTS OF INCOME

FortheyearsendedJanuary31Dollars in thousands, except per-share data 2007 2006 2005Netsales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086Costofgoodssold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,647 151,297 124,886

Grossprofit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,882 53,231 43,200

Selling,generalandadministrativeexpenses . . . . . . . . . . . . . . . . . 16,580 15,868 14,056Lossondispositionofbusinessesandassets,net . . . . . . . . . . . . . — 79 1,282

Operatingincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,302 37,284 27,862

Interestexpense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 35 35Interestincomeandother,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (535) (245) (128) Incomebeforeincometaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,835 37,494 27,955

Incometaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,394 13,232 10,064

Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,441 $ 24,262 $ 17,891

Netincomepercommonshare: –Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.41 $ 1 .34 $ 0 .99 –Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ 1 .32 $ 0 .97


34

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Accumulated Other $1Par Comprehensive Common Paid-in Treasurystock Retained IncomeDollars in thousands, except per-share data Stock Capital Shares Cost Earnings (Loss) TotalBalanceJanuary31,2004 . . . . . . . . . . . . . . . . $15,954 $ 784 (6,933,443) $ (38,181) $ 87,914 $ — $66,471

Netandcomprehensiveincome . . . . . . . . . . — — — — 17,891 — 17,891 Cashdividends($ .220pershare) . . . . . . . . . — — — — (3,971) — (3,971) Cashdividend–Special($ .625pershare) . . — — — — (11,327) — (11,327) Two-for-onestocksplit . . . . . . . . . . . . . . . . . 15,954 (411) (6,933,443) — (15,543) — — Purchaseofstock . . . . . . . . . . . . . . . . . . . . . — — (186,500) (3,519) — — (3,519) Purchaseandretirementofstock . . . . . . . . (40) (646) — — — — (686) Employees’stockoptionsexercised . . . . . . . 185 327 — — — — 512 Share-basedcompensation . . . . . . . . . . . . . — 309 — — — — 309 Taxbenefitfromexerciseofstockoptions . . — 402 — — — — 402BalanceJanuary31,2005 . . . . . . . . . . . . . . . . 32,053 765 (14,053,386) (41,700) 74,964 — 66,082

Netincome . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 24,262 — 24,262 Foreigncurrencytranslation . . . . . . . . . . . . — — — — — 13 13 Totalcomprehensiveincome . . . . . . . . . . . . 24,275 Cashdividends($ .280pershare) . . . . . . . . . — — — — (5,056) — (5,056) Purchaseofstock . . . . . . . . . . . . . . . . . . . . . — — (67,800) (1,689) — — (1,689) Purchaseandretirementofstock . . . . . . . . (27) (689) — — — — (716) Employees’stockoptionsexercised . . . . . . . 168 410 — — — — 578 Share-basedcompensation . . . . . . . . . . . . . — 485 — — — — 485 Taxbenefitfromexerciseofstockoptions . . — 430 — — — — 430BalanceJanuary31,2006 . . . . . . . . . . . . . . . . 32,194 1,401 (14,121,186) (43,389) 94,170 13 84,389

Netincome . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 25,441 — 25,441 Foreigncurrencytranslation . . . . . . . . . . . . — — — — — (21) (21) Totalcomprehensiveincome . . . . . . . . . . . . 25,420 AdoptionofSFASNo .158,netoftax . . . . . . — — — — — (1,885) (1,885) Dividends($ .360pershare) . . . . . . . . . . . . . — 1 — — (6,508) — (6,507) Purchaseofstock . . . . . . . . . . . . . . . . . . . . . — — (146,247) (4,201) — — (4,201) Purchaseandretirementofstock . . . . . . . . (28) (854) — — — — (882) Employees’stockoptionsexercised . . . . . . . 141 718 — — — — 859 Share-basedcompensation . . . . . . . . . . . . . — 605 — — — — 605 Taxbenefitfromexerciseofstockoptions . . — 470 — — — — 470Balance January 31, 2007 . . . . . . . . . . . . . . . $32,307 $2,341 (14,267,433) $(47,590) $113,103 $(1,893) $98,268



CONSOLIDATED STATEMENTS OF CASH FLOWS

FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005Cashflowsfromoperatingactivities: Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,441 $24,262 $17,891 Adjustmentstoreconcilenetincometonetcashprovidedby operatingactivities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,445 4,684 3,410 Amortizationofintangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 467 431 Provisionforlossesonaccountsreceivable,netofrecoveries . . . . . . . . 40 78 34 Lossondispositionofbusinessesandassets . . . . . . . . . . . . . . . . . . . . . — 79 1,282 Deferredincometaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (293) (809) (31) Share-basedcompensationexpense . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 485 309 Changeinoperatingassetsandliabilities,netofeffectsfrom acquisitionanddispositionofbusinessesandassets . . . . . . . . . . . . (5,380) (8,086) (4,669) Otheroperatingactivities,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 29 214 Netcashprovidedbyoperatingactivities . . . . . . . . . . . . . . . . . . . . . . . . . 26,313 21,189 18,871

Cashflowsfrominvestingactivities: Capitalexpenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,522) (10,358) (7,541) Purchaseofshort-terminvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000) (4,500) (3,000) Saleofshort-terminvestments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 5,500 4,000 Acquisitionofbusinesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (203) (2,828) (414) Saleof(investmentin)unconsolidatedaffiliate . . . . . . . . . . . . . . . . . . . . . — 650 (650) Otherinvestingactivities,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 101 (26) Netcashusedininvestingactivities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,664) (11,435) (7,631)

Cashflowsfromfinancingactivities: Proceedsfromborrowingunderlineofcredit . . . . . . . . . . . . . . . . . . . . . . — 4,500 — Repaymentofborrowingunderlineofcredit . . . . . . . . . . . . . . . . . . . . . . — (4,500) — Dividendspaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,507) (5,056) (15,298) Purchasesoftreasurystock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,201) (1,689) (3,519) Excesstaxbenefitonstockoptionexercises . . . . . . . . . . . . . . . . . . . . . . . 470 — — Otherfinancingactivities,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39) (201) (246) Netcashusedinfinancingactivities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,277) (6,946) (19,063)

Effectofexchangeratechangesoncash . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (18) —

Net(decrease)increaseincashandcashequivalents . . . . . . . . . . . . . . . . . . (2,626) 2,790 (7,823)Cashandcashequivalentsatbeginningofyear . . . . . . . . . . . . . . . . . . . . . . 9,409 6,619 14,442Cashandcashequivalentsatendofyear . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,783 $ 9,409 $ 6,619


36

NOTES TO FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATIONTheconsolidatedfinancialstatementsincludetheaccountsofRavenIndustries,Inc .anditswhollyownedsubsidiaries(thecompany) .Thecompanyisanindustrialmanufacturerprovidingavarietyofproductstocustomerswithintheindustrial,agricultural,constructionandmilitary/aerospacemarketsprimarilyinNorthAmerica .Thecompanyoperatesthreedivisions(FlowControls,EngineeredFilmsandElectronicSystems)inadditiontothreewhollyownedsubsidiaries:AerostarInternational,Inc .(Aerostar);RavenIndustriesCanada,Inc .(RavenCanada);andRavenIndustriesGmbH(RavenGmbH) .Allsignificantintercompanybalancesandtransactionshavebeeneliminatedinconsolidation .

USE OF ESTIMATESThepreparationofthecompany’sfinancialstatementsinconfor-mitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakecertainestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesasofthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiods .Actualresultscoulddifferfromtheseestimates .

FOREIGN CURRENCYThecompany’ssubsidiariesthatoperateoutsidetheUnitedStatesusetheirlocalcurrencyasthefunctionalcurrency .ThefunctionalcurrencyistranslatedintoU .S .dollarsforbalancesheetaccountsusingtheperiod-endexchangerates,andaverageexchangeratesforthestatementofincome .Adjustmentsresultingfromfinancialstatementtranslationsareincludedascumulativetranslationadjustmentsinaccumulatedothercomprehensiveincome(loss)withinshareholders’equity .Foreigncurrencytransactiongainsorlossesarerecognizedintheperiodincurredandareincludedininterestincomeandother,netintheConsolidatedStatementsofIncome .

CASH AND CASH EQUIVALENTSThecompanyconsidersallhighlyliquiddebtinstrumentswithoriginalmaturitiesofthreemonthsorlesstobecashequivalents .CashandcashequivalentbalancesareprincipallyconcentratedincheckingandsweepaccountswithWellsFargoBank .

SHORT-TERM INVESTMENTSThecompanyhasinvested$4 .0millionincertificatesofdepositandU .S .TreasuryBillswithratesrangingfrom5 .00%to5 .25% .Theinvestmentshavevaryingmaturitydates,allofwhicharelessthan12monthsfromthebalancesheetdate .

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTSTradeaccountsreceivablearerecordedattheinvoicedamountanddonotbearinterest .Theallowancefordoubtfulaccountsisthecompany’sbestestimateoftheamountofprobablecreditlossesbasedonhistoricalwriteoffexperiencebysegmentandanestimateofthecollectibilityofanyknownproblemaccounts .

INVENTORY VALUATIONInventoriesarestatedatthelowerofcostormarket,withcostdeterminedonthefirst-in,first-outbasis .Marketvalueencom-passesconsiderationofallbusinessfactorsincludingprice,contracttermsandusefulness .

PROPERTY, PLANT AND EQUIPMENTProperty,plantandequipmentarestatedatcostandaredepreciatedovertheestimatedusefullivesoftheassetsusingacceleratedmethods .Theestimatedusefullivesusedforcomput-ingdepreciationareasfollows:

Buildingandimprovements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-39yearsManufacturingequipmentbysegment FlowControls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3- 5years EngineeredFilms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-12years ElectronicSystems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3- 5years Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3- 5yearsFurniture,fixtures,officeequipmentandother . . . . . . . . . . . . . . . . . 3- 7years

Maintenanceandrepairsarechargedtoexpenseintheyearincurredandrenewalsandbettermentsarecapitalized .Thecostandrelatedaccumulateddepreciationofassetssoldordisposedofareremovedfromtheaccounts,andtheresultinggainorlossisreflectedinoperations .

INTANGIBLE ASSETSIntangibleassets,primarilycomprisedoftechnologiesacquiredthroughacquisition,arerecordedatcostandarepresentednetofaccumulatedamortization .Amortizationiscomputedonastraight-linebasisoverestimatedusefullivesrangingfrom3to20years .Thestraight-linemethodofamortizationreflectsanappropriateallocationofthecostoftheintangibleassetstoearningsineachreportingperiod .

GOODWILLThecompanyrecognizestheexcesscostofanacquiredentityoverthenetamountassignedtoassetsacquiredandliabilitiesassumedasgoodwill .Goodwillistestedforimpairmentonanannualbasisduringthefourthquarter,andbetweenannualtestswheneverthereisanimpairmentindicated .Fairvaluesareesti-matedbasedondiscountedcashflowsandarecomparedwiththecorrespondingcarryingvalueoftherelatedasset .


LONG-LIVED ASSETSThecompanyperiodicallyassessestherecoverabilityoflong-livedandintangibleassetsusingfairvaluemeasurementtechniques,wherefairvalueiscalculatedbaseduponanticipatedfutureearn-ingsandundiscountedoperatingcashflows .Ifthefairvalueislessthanthecarryingamountoftheasset,animpairmentlossisrecognizedtotheextentthecarryingvalueexceedsthefairvalueoftheasset .

INSURANCE OBLIGATIONSThecompanyemploysinsurancepoliciescoveringworkers’compensationandgeneralliabilitycosts .Liabilitiesareaccruedrelatedtoclaimsfiledandestimatesforclaimsincurredbutnotreported .Totheextenttheseobligationswillbereimbursedbyinsurance,theexpectedreimbursementisincludedasacompo-nentofothercurrentassets .

CONTINGENCIESThecompanyisinvolvedasadefendantinlawsuits,claimsordisputesarisinginthenormalcourseofbusiness .Anestimateofthelossonthesemattersischargedtooperationswhenitisprobablethatanassethasbeenimpairedoraliabilityhasbeenincurred,andtheamountofthelosscanbereasonablyestimated .Thesettlementofsuchclaimscannotbedeterminedatthistime;however,managementbelievesthatanyliabilityresultingfromtheseclaimswillbesubstantiallymitigatedbyinsurancecover-age .Accordingly,managementdoesnotbelievethattheultimateoutcomeofthesematterswillbesignificanttoitsresultsofopera-tions,financialpositionorcashflows .

REVENUE RECOGNITIONThecompanyrecognizesrevenueuponshipmentofproducts .Thecompanysellsdirectlytocustomersordistributorswhoincurtheexpenseandcommitmentforanypost-saleobligationsbeyondstatedwarrantyterms .Estimatedreturns,salesallowancesorwarrantychargesarerecognizeduponshipmentofaproduct .Shippingandhandlingcostsareclassifiedasacomponentofcostofgoodssold .

WARRANTIESAccrualsnecessaryforproductwarrantiesareestimatedbaseduponhistoricalwarrantycostsandaveragetimeelapsedbetweenpurchasesandreturnsforeachdivision .Additionalaccrualsaremadeforanysignificant,discretewarrantyissues .

RESEARCH AND DEVELOPMENTResearchanddevelopmentexpendituresof$2 .6millioninfiscal2007,$2 .5millioninfiscal2006,and$2 .0millioninfiscal2005werechargedtocostofgoodssoldintheyearincurred .Expendituresareprincipallycomposedoflaborandmaterialcosts .

SHARE-BASED COMPENSATIONInfiscal2003,thecompanybeganrecordingcompensationexpenserelatedtoitsshare-basedcompensationplansusingthefairvaluemethodpermittedbySFASNo .123,Accounting for Stock-Based Compensation.OnFebruary1,2006,thecompanyadoptedSFASNo .123(R),Share-Based Payment.SFASNo .123(R)requiresthatthecashretainedasaresultofthetaxdeductibilityofemployeeshare-basedawardsbepresentedasacomponentofcashflowsfromfinancingactivitiesintheconsolidatedstatementofcashflows .Inpriorperiods,thecompanyreportedtheseamountsasacomponentofcashflowsfromoperatingactivities .TheadoptionofSFASNo .123(R)hashadnoothereffectonconsolidatedresultsofoperations,financialcondition,orcashflows .

INCOME TAXESDeferredincometaxesreflecttemporarydifferencesbetweenassetsandliabilitiesreportedonthecompany’sbalancesheetandtheirtaxbases .Thesedifferencesaremeasuredusingenactedtaxlawsandstatutorytaxratesapplicabletotheperiodswhenthetemporarydifferenceswillaffecttaxableincome .Deferredtaxassetsarereducedbyavaluationallowancetoreflectrealizablevalue,whennecessary .Judgmentalreservesaremaintainedforincometaxauditsandothertaxissues .

NEW ACCOUNTING STANDARDSInSeptember2006,theFinancialAccountingStandardsBoard(FASB)issuedSFAS157,Fair Value Measurement.Thestandardprovidesguidanceforusingfairvaluetomeasureassetsandliabilities .SFAS157clarifiestheprinciplethatfairvalueshouldbebasedontheassumptionsmarketparticipantswouldusewhenpricinganassetorliabilityandestablishesafairvaluehierarchythatprioritizestheinformationusedtodevelopthoseassump-tions .Underthestandard,fairvaluemeasurementswouldbeseparatelydisclosedbylevelwithinthefairvaluehierarchy .Thestatementiseffectiveasofthebeginningofthecompany’s2008fiscalyear .ThecompanydoesnotexpecttheimplementationofSFAS157tohaveamaterialimpactonitsconsolidatedresultsofoperations,financialconditionorcashflows .

InOctober2006,theFASBissuedFASBInterpretationNo .48,Accounting for Uncertainty in Income Taxes(FIN48) .FIN48isaninterpretationofFASBStatementNo .109,Accounting for Income Taxes,anditseekstoreducethediversityinpracticeassociatedwithcertainaspectsofmeasurementandrecognitioninaccount-ingforincometaxes .Inaddition,FIN48requiresexpandeddisclosurewithrespecttotheuncertaintyinincometaxesandiseffectiveasofthebeginningofthecompany’s2008fiscalyear .ThecompanydoesnotexpecttheadoptionofFIN48tohaveasignificantimpactonitsconsolidatedresultsofoperations,financialconditionorcashflows .

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NOTES TO FINANCIAL STATEMENTS (continued)

Note 2. Selected Balance Sheet InformationFollowingarethecomponentsofselectedbalancesheetitems: AsofJanuary31Dollars in thousands 2007 2006 2005Accountsreceivable,net:Tradeaccounts . . . . . . . . . . . . . . . . . . . . . . . . $31,594 $29,547 $25,635Allowancefordoubtfulaccounts . . . . . . . . . . (258) (257) (265)

$31,336 $29,290 $25,370

Inventories,net:Finishedgoods . . . . . . . . . . . . . . . . . . . . . . . . $ 3,750 $ 3,504 $ 3,538Inprocess . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,612 3,652 2,820Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,709 20,663 16,957

$28,071 $27,819 $23,315

Property,plantandequipment,net:Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,227 $ 1,084 $ 1,084Buildingsandimprovements . . . . . . . . . . . . . 21,494 16,662 15,184Machineryandequipment . . . . . . . . . . . . . . . 52,552 43,256 36,486Accumulateddepreciation . . . . . . . . . . . . . . . (39,009) (35,400) (32,790)

$36,264 $25,602 $19,964

Otherassets,net:Amortizableassets: Purchasedtechnology . . . . . . . . . . . . . . . . $ 3,380 $ 3,380 $ 1,080 Otherintangibles . . . . . . . . . . . . . . . . . . . . 1,305 1,265 946 Accumulatedamortization . . . . . . . . . . . . . (2,729) (2,300) (1,831)

1,956 2,345 195Investmentinunconsolidatedaffiliate . . . . . . — — 650Deferredincometaxes . . . . . . . . . . . . . . . . . . 1,607 318 —Other,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 146 175

$ 3,677 $ 2,809 $ 1,020

Accruedliabilities:Salariesandbenefits . . . . . . . . . . . . . . . . . . . $ 1,722 $ 2,167 $ 1,992Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,212 2,119 1,852401(k)contributions . . . . . . . . . . . . . . . . . . . . 1,109 1,049 980Insuranceobligations . . . . . . . . . . . . . . . . . . . 1,743 1,632 1,541Incometaxes . . . . . . . . . . . . . . . . . . . . . . . . . 265 808 567Profitsharing . . . . . . . . . . . . . . . . . . . . . . . . . 553 1,168 900Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 569 452Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,578 1,642 1,489

$ 9,579 $11,154 $ 9,773

Note 3. Supplemental Cash Flow Information FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005Changesinoperatingassetsandliabilities, netofeffectsfromacquisitionand dispositionofbusinessesandassets: Accountsreceivable . . . . . . . . . . . . . . . . $ (2,097) $(3,821) $(6,950) Inventories . . . . . . . . . . . . . . . . . . . . . . . (262) (4,356) (6,704) Prepaidexpensesandotherassets . . . . (284) (103) 150 Accountspayable . . . . . . . . . . . . . . . . . . (1,770) (2,688) 6,576 Accruedandotherliabilities . . . . . . . . . (1,045) 3,021 1,777 Customeradvances . . . . . . . . . . . . . . . . 78 (139) 482

$ (5,380) $(8,086) $(4,669)

Cashpaidduringtheyearfor: Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 $ 35 $ 77 Incometaxes . . . . . . . . . . . . . . . . . . . . . $13,759 $12,806 $9,596

Note 4. Montgomery Industries AcquisitionOnFebruary17,2005,thecompanyacquiredsubstantiallyalloftheassetsofMontgomeryIndustries,Inc .,aprivatelyheldCanadiancorporation,for$2 .7millionincashplustheassump-tionofcertainliabilitiesandaquarterlypaymentof6percentonfuturesalesofMontgomeryproductsuptoamaximumpaymentof$1 .825million .Montgomerydevelopedandsoldanautomaticboomheightcontrolsystemunderthename“Autoboom™”foragriculturalsprayersdesignedtosuccessfullymaintainoptimumboomheightinuneventerrainwithoutcompromisingthespeedwithwhichthesprayercanbeoperated .Ofthepurchaseprice,$289,000wasallocatedtocurrentassets;$82,000wasallocatedtoproperty,plantandequipment;$2 .560millionwasallocatedtoamortizableintangibleassets(amortizedoverapproximatelysevenyears);$539,000tocurrentliabilitiesassumed;and$285,000togoodwill,whichisdeductiblefortaxpurposes .

FortheyearsendedJanuary31,2007and2006,theearn-outonthesalesofMontgomeryproductswas$203,000and$183,000,respectively,whichwasrecordedasanincreaseingoodwill .

TheoperationisacomponentoftheFlowControlssegment .Theresultsofoperationsfortheacquiredbusinesshavebeenincludedintheconsolidatedfinancialstatementssincethedateofacquisition .Proformaearningsarenotpresentedduetotheimmaterialityoftheeffectoftheacquisitiontothecompany’sconsolidatedoperations .

Note 5. Divestitures and Other Repositioning ActivitiesA$79,000pretaxlosswasincurredduringfiscal2006fromincreasedliabilitiesforenvironmentalissuesrelatedtothecompany’sfiscal2000saleofitsGlasstitesubsidiary .AtJanuary31,2007,thecompanyhadanundiscountedaccrualremainingof$109,000forenvironmentalmonitoringandclean-upcostsofsoldoperations .

Inthethirdquarteroffiscal2005,theFlowControlsbusinesssegmentdecidedtoabandonitsFluentSystemsproductline,incurringa$1 .3millionpretaxwriteoffofinventory,equipment,intangibleassetsandgoodwill .


Note 6. Goodwill and Other Intangibles

GoodwillThechangesinthecarryingamountofgoodwillbyreportingsegmentareshownbelow: Flow Engineered ElectronicDollars in thousands Controls Films Systems Aerostar TotalBalanceatJanuary31,2004 . . $ 5,783 $96 $ 433 $ 464 $ 6,776 Adjustment . . . . . . . . . . . . . 5 — — — 5 WriteoffofFluentSystems . . (848) — — — (848)BalanceatJanuary31,2005 . . 4,940 96 433 464 5,933 Goodwillacquiredduring theyear . . . . . . . . . . . . . . 285 — — — 285 Acquisitionearn-outs . . . . . . 183 — — — 183BalanceatJanuary31,2006 . . 5,408 96 433 464 6,401 Acquisitionearn-outs . . . . . . 203 — — — 203Balance at January 31, 2007 $5,611 $96 $433 $464 $6,604

Intangible AssetsEstimatedfutureamortizationexpensebasedonthecurrentcarryingvalueofamortizableintangibleassetsforfiscalperiods2008through2012is$391,000,$379,000,$377,000,$357,000,and$352,000,respectively .

Note 7. Employee Retirement BenefitsThecompanyhasa401(k)plancoveringsubstantiallyallemployeesandcontributed3%ofqualifiedpayroll .Thecompany’scontributionexpensewas$935,000,$892,000,and$836,000forfiscal2007,2006and2005,respectively .

Inaddition,thecompanyprovidespostretirementmedicalandotherbenefitstoseniorexecutiveofficersandseniormanagers .Therearenoassetsheldfortheplansandanyobligationsarecoveredthroughthecompany’soperatingcashandinvestments .ThecompanyaccountsforthesebenefitsinaccordancewithSFASNo .106,Accounting for Postretirement Benefits Other Than Pensions.AtJanuary31,2007,thecompanyadoptedSFASNo .158,Employers’ Accounting for Defined Pension and Other Postretirement Plans.Thisstatementrequiresthecompanytofullyrecognizetheliabilityforitspostretirementbenefitsthroughchangesinaccumulatedothercomprehensiveincome .

TheincrementaleffectofapplyingSFASNo .158onthefollowingbalancesheetitemsisasfollows: ImpactofSFASNo .158Dollars in thousands Before Adjustment AfterNon-currentdeferredtaxassets . . . . . . . . . . $ 592 $1,015 $ 1,607Totalassets . . . . . . . . . . . . . . . . . . . . . . . . . 118,749 1,015 119,764Otherliabilities . . . . . . . . . . . . . . . . . . . . . . . 2,132 2,900 5,032Accumulatedothercomprehensive income(loss) . . . . . . . . . . . . . . . . . . . . . . (8) (1,885) (1,893)Totalshareholders’equity . . . . . . . . . . . . . . 100,153 (1,885) 98,268

Theaccumulatedbenefitobligationforthesebenefitsisshownbelow: FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005Benefitobligationatbeginningofyear . . . . . . . . $4,928 $2,722 $2,607Servicecost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 80 58Interestcost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 259 186Actuarialloss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 2,014 27Retireebenefitspaid . . . . . . . . . . . . . . . . . . . . . . (166) (147) (156)Benefitobligationatendofyear . . . . . . . . . . . . . 5,213 4,928 2,722Less:unrecognizedactuariallosses . . . . . . . . . . . — (3,045) (1,275)Endingliabilitybalance . . . . . . . . . . . . . . . . . . . . $5,213 $1,883 $1,447

Theliabilityandexpensereflectedinthebalancesheetandincomestatementareasfollows: FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005Beginningliabilitybalance . . . . . . . . . . . . . . . . . . $1,883 $1,447 $1,212Employerexpense . . . . . . . . . . . . . . . . . . . . . . . . 596 583 391InitialeffectofadoptingSFASNo .158 . . . . . . . . . 2,900 — —Retireebenefitspaid . . . . . . . . . . . . . . . . . . . . . . (166) (147) (156)Endingliabilitybalance . . . . . . . . . . . . . . . . . . . . 5,213 1,883 1,447Currentportion . . . . . . . . . . . . . . . . . . . . . . . . . . (181) (174) (180)Long-termportion . . . . . . . . . . . . . . . . . . . . . . . . $5,032 $1,709 $1,267

Assumptionsused:Discountrate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00% 5 .75% 7 .00%Wageinflationrate . . . . . . . . . . . . . . . . . . . . . . . 4.00% 4 .00% 4 .00%

Thediscountrateisbasedonmatchingratesofreturnonhigh-qualityfixed-incomeinvestmentswiththetimingandamountofexpectedbenefitpayments .Nomaterialfluctuationsinretireebenefitpaymentsareexpectedinfutureyears .

Theassumedhealthcarecosttrendrateforfiscal2007was9 .64%ascomparedto9 .39%and7 .00%assumedforfiscal2006and2005 .Theimpactofaone-percentage-pointchangeinassumedhealthcarerateswouldnotbesignificanttothecompany’sincomestatementandwouldaffecttheendingliabilitybalancebyapproximately$800,000 .Theratetowhichthefiscal2007healthcarecosttrendrateisassumedtodeclinetois4 .5%,whichistheultimatetrendrate .Thefiscalyearthattheratereachestheultimatetrendrateisexpectedtobefiscal2027 .

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Note 8. WarrantiesChangesinthewarrantyaccrualwereasfollows: AsofJanuary31Dollars in thousands 2007 2006 2005Beginningbalance . . . . . . . . . . . . . . . . . . . . . . . . . . $ 569 $452 $263Accrualforwarranties . . . . . . . . . . . . . . . . . . . . . . . 1,317 958 932Settlementsmade(incashorinkind) . . . . . . . . . . . (1,489) (841) (743)Endingbalance . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 397 $569 $452

Note 9. Income TaxesThereconciliationofincometaxcomputedatthefederalstatutoryratetothecompany’seffectiveincometaxrateisasfollows: Fortheyearsended January31Dollars in thousands 2007 2006 2005TaxatU .S .federalstatutoryrate . . . . . . . . . . . . . . . 35.0% 35 .0% 35 .0%Stateandlocalincometaxes, netofU .S .federalbenefit . . . . . . . . . . . . . . . . . . 1.1 1 .1 0 .9Taxbenefitonqualifiedproductionactivities . . . . . . (1.0) (1 .0) —Taxcreditforresearchactivities . . . . . . . . . . . . . . . . (0.5) (0 .1) —Other,net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) 0 .3 0 .1

34.5% 35 .3% 36 .0%

Significantcomponentsofthecompany’sincometaxprovisionareasfollows: FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005Incometaxes:Currentlypayable . . . . . . . . . . . . . . . . . . . . . . $13,687 $14,041 $10,095Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (293) (809) (31)

$13,394 $13,232 $10,064

Significantcomponentsofthecompany’sdeferredtaxassetsandliabilitiesareasfollows: AsofJanuary31Dollars in thousands 2007 2006 2005Currentdeferredtaxassets: Accountsreceivable . . . . . . . . . . . . . . . . . . . . . $ 91 $ 88 $ 93 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 220 237 Accruedvacation . . . . . . . . . . . . . . . . . . . . . . . 711 680 591 Insuranceobligations . . . . . . . . . . . . . . . . . . . . 357 282 161 Otheraccruedliabilities . . . . . . . . . . . . . . . . . . 390 476 383

1,761 1,746 1,465Non-currentdeferredtaxassets(liabilities): Postretirementandotheremployeebenefits . . 1,758 598 443 Depreciationandamortization . . . . . . . . . . . . (405) (439) (771) Netoperatinglosscarryforward(a) . . . . . . . . . 82 — — Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 159 118

1,607 318 (210)Netdeferredtaxasset . . . . . . . . . . . . . . . . . . . . . $3,368 $2,064 $1,255

(a) The company’s Canadian operation incurred a $210,000 net operating loss that, if unused, will expire in 2017.

Note 10. Financing ArrangementsThecompanyhasanuncollateralizedcreditagreementprovid-ingalineofcreditof$8 .0millionwithamaturitydateofAugust1,2007,bearinginterestat0 .25%undertheprimerate .Lettersofcredittotaling$1 .3millionhavebeenissuedundertheline,primarilytosupportself-insuredworkers’compensationbondingrequirements .NoborrowingswereoutstandingasofJanuary31,2007,2006or2005,and$6 .7millionwasavailableatJanuary31,2007 .BorrowingsonthecreditlineboreinterestasofJanuary31,2007,2006and2005at8 .00%,7 .25%,and5 .25%,respec-tively .Theweighted-averageinterestrateforborrowingundertheshort-termcreditlineinfiscal2006was5 .63% .Therewerenoborrowingsunderthecreditlineinfiscalyears2007or2005 .

WellsFargoBank,N .A .providesthecompany’slineofcreditandholdsthecompany’scashandcashequivalents .Onememberofthecompany’sboardofdirectorsisalsoontheboardofdirectorsofWellsFargo&Co .,theparentcompanyofWellsFargoBank,N .A .

Thecompanyleasescertainvehicles,equipmentandfacili-tiesunderoperatingleases .Totalrentandleaseexpensewas$351,000,$381,000,and$305,000infiscal2007,2006and2005,respectively .Futureminimumleasepaymentsundernon-cancelableoperatingleasesforfiscalperiods2008to2010are$235,000,$64,000,and$6,000withallleasesscheduledtoexpirebyfiscal2010 .

Note 11. Share-based CompensationAtJanuary31,2007,thecompanyhadtwoshare-basedcompen-sationplans,whicharedescribedbelow .Thecompensationcostfortheseplanswas$605,000,$485,000,and$309,000infiscal2007,2006,and2005,respectively .Therelatedincometaxbenefitrecordedintheincomestatementwas$57,000,$58,000,and$38,000forfiscal2007,2006,and2005,respectively .CompensationcostcapitalizedaspartofinventoryatJanuary31,2007,2006,and2005was$40,000,$63,000and$40,000,respectively .

2000 Stock Option and Compensation PlanThecompany’s2000StockOptionandCompensationPlan,approvedbytheshareholders,isadministeredbythePersonnelandCompensationCommitteeoftheBoardofDirectorsandallowsforeitherincentiveornon-qualifiedoptionswithtermsnottoexceed10years .Thereare511,875sharesofthecompany’scommonstockreservedforfutureoptiongrantsundertheplanatJanuary31,2007 .Optionsaregrantedwithexercisepricesnotlessthanmarketvalueatthedateofgrant .Thestockoptionsvestoverafour-yearperiodandexpireafterfiveyears .Optionscontainretirementandchangeincontrolprovisionswhichmayacceleratethevestingperiod .ThefairvalueofeachoptiongrantisestimatedonthedateofgrantusingtheBlack-Scholesoptionpricingmodel .


Thecompanyuseshistoricaldatatoestimateoptionexerciseandemployeeterminationwithinthevaluationmodel .

ThefairvalueofeachoptiongrantisestimatedonthedateofgrantusingtheBlack-Scholesoptionpricingmodelwiththefollowingweightedaverageassumptionsbygrantyear . FortheyearsendedJanuary31 2007 2006 2005Risk-freeinterestrate . . . . . . . . . . . . . . . . . . 4.45% 4 .36% 3 .51%Expecteddividendyield . . . . . . . . . . . . . . . . 1.29% 0 .90% 1 .07%Expectedvolatilityfactor . . . . . . . . . . . . . . . 38.97% 39 .25% 34 .92%Expectedoptionterm(inyears) . . . . . . . . . . 4.25 4 .25 4 .50Weightedaveragegrantdatefairvalue . . . . $ 9.51 $10 .90 $ 5 .91

InformationregardingoptionactivityfortheyearendedJanuary31,2007isasfollows: Weighted average Weighted Aggregate remaining average intrinsic contractual Number exercise value term ofoptions price (in000’s) (years)Outstandingat beginningofyear . . . . . . . 519,414 $14.05 Granted . . . . . . . . . . . . 83,700 28.01 Exercised . . . . . . . . . . . (140,989) 6.10 Forfeited . . . . . . . . . . . (15,075) 22.37Outstandingatendofyear . 447,050 $18.89 $4,455 2 .55

Optionsexercisable atendofyear . . . . . . . . . 245,700 $13.24 $3,780 1 .61

Theintrinsicvalueofastockawardistheamountbywhichthefairvalueoftheunderlyingstockexceedstheexercisepriceoftheaward .Thetotalintrinsicvalueofoptionsexercisedwas$3 .7million,$3 .6millionand$2 .7millionduringtheyearsendedJanuary31,2007,2006and2005,respectively .AsofJanuary31,2007,thetotalcompensationcostfornon-vestedawardsnotyetrecognizedinthecompany’sstatementsofincomewas$1 .3million,netoftheeffectofestimatedforfeitures .Thisamountisexpectedtoberecognizedoveraweightedaverageperiodof2 .58years .

Deferred Stock Compensation Plan for DirectorsOnMay23,2006,thecompany’sstockholdersapprovedtheDeferredStockCompensationPlanforDirectorsofRavenIndustries,Inc .Undertheplan,astockunitistherighttoreceiveoneshareofthecompany’scommonstockasdeferredcompensa-tion,tobedistributedfromanaccountestablishedinthenameofthenon-employeedirectorbythecompany .Stockunitshavethesamevalueasashareofcommonstockbutcannotbesold .Stockunitsareacomponentofthecompany’sequity .Theplanreserves50,000commonsharesfortheconversionofstockunitsintocommonstockafterdirectorsretirefromtheBoard .TheplanisadministeredbytheGovernanceCommitteeoftheBoardofDirectors .

Stockunitsgrantedunderthisplanvestimmediatelyandareexpensedatthedateofgrant .Stockunitsarealsoaccumulatedifadirectorelectstodefertheannualretainerpaidforboardservice .Whendividendsarepaidonthecompany’scommonshares,stockunitsareaddedtothedirector’sbalancesandacorrespondingamountisremovedfromretainedearnings .Theintrinsicvalueofastockunitisthefairvalueoftheunder-lyingshares .

InformationregardingoutstandingstockunitsfortheyearendedJanuary31,2007isasfollows: Weighted Number average ofunits priceOutstandingatbeginningofyear . . . . . . . . . . . . . — $ —Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,743 32 .06Deferredretainers . . . . . . . . . . . . . . . . . . . . . . . . . 1,040 32 .06Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 28 .65Convertedintocommonshares . . . . . . . . . . . . . . . — —Outstandingatendofyear . . . . . . . . . . . . . . . . . . 4,828 $28 .43

Note 12. Net Income Per ShareBasicnetincomepershareiscomputedbydividingnetincomebytheweighted-averagecommonsharesandstockunitsoutstand-ing .Dilutednetincomepershareiscomputedbydividingnetincomebytheweighted-averagecommonandcommonequiva-lentsharesoutstanding(whichincludesthesharesissuableuponexerciseofemployeestockoptionsnetofsharesassumedpurchasedwiththeoptionproceeds)andstockunitsoutstanding .Certainoutstandingoptionswereexcludedfromthedilutednetincomeper-sharecalculationsbecausetheireffectwouldhavebeenanti-dilutive,astheirexercisepricesweregreaterthantheaveragemarketpriceofthecompany’scommonstockduringthoseperiods .Forfiscal2007,2006,and2005,96,075,19,125,and21,650options,respectively,wereexcludedfromthedilutednetincomeper-sharecalculation .Detailsofthecomputationarepresentedbelow . FortheyearsendedJanuary31 2007 2006 2005Numerator: Netincome(in thousands) . . . . . . . $25,441 $24,262 $17,891

Denominator: Weightedaverage commonsharesoutstanding . . . 18,082,606 18,055,439 18,066,223 Weightedaveragestock unitsoutstanding . . . . . . . . . . . . 3,602 — — Denominatorfor basiccalculation . . . . . . . . 18,086,208 18,055,439 18,066,223

Weightedaverage commonsharesoutstanding . . . 18,082,606 18,055,439 18,066,223 Weightedaverage stockunitsoutstanding . . . . . . . 3,602 — — Dilutiveimpactofstockoptions . . 186,705 259,104 344,104 Denominatorfor dilutedcalculation . . . . . . . . . 18,272,913 18,314,543 18,410,327

Netincomepershare–basic . . . . . . . $ 1 .41 $ 1 .34 $ 0 .99Netincomepershare–diluted . . . . . $ 1 .39 $ 1 .32 $ 0 .97

42


Note 13. Business Segments and Major Customer InformationThecompany’sreportablesegmentsaredefinedbytheircommontechnologies,productionprocessesandinventories .ThesesegmentsreflecttheorganizationofthecompanyintothethreeRavendivisions,eachwithaDivisionalVicePresident,anditsAerostarsubsidiary .RavenCanadaandRavenGmbHareconsoli-datedwiththeFlowControlsDivision .

EngineeredFilmsproducesruggedreinforcedplasticsheetingforindustrial,construction,manufacturedhousingandagricultureapplications .FlowControls,includingRavenCanadaandRavenGmbH,provideselectronicandGlobalPositioningSystem(GPS)productsfortheprecisionagriculture,marinenavigationandothernichemarkets .ElectronicSystemsisatotal-solutionsproviderofelectronicsmanufacturingservices .Aerostarmanufacturesmilitaryparachutes,governmentserviceuniforms,custom-shapedinflatableproductsandhigh-altitudeballoonsforgovernmentandcommercialresearch .

Thecompanymeasurestheperformanceofitssegmentsbasedontheiroperatingincomeexclusiveofadministrativeandgeneralexpenses .TheaccountingpoliciesoftheoperatingsegmentsarethesameasthosedescribedinNote1,SummaryofSignificantAccountingPolicies .Otherincome,interestexpenseandincometaxesarenotallocatedtoindividualoperatingsegments,andassetsnotidentifiabletoanindividualsegmentareincludedascorporateassets .Segmentinformationisreportedconsistentwiththecompany’smanagementreportingstructureasrequiredbySFASNo .131,Disclosures about Segments of an Enterprise and Related Information.

Businesssegmentinformationisasfollows: FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005ENGINEERED FILMS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,082 $ 82,794 $ 58,657Operatingincome . . . . . . . . . . . . . . . . . 23,440 19,907 15,739Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 41,988 33,512 25,181Capitalexpenditures . . . . . . . . . . . . . . . 13,266 7,359 3,960Depreciation&amortization . . . . . . . . . 2,887 2,436 1,403

FLOW CONTROLS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,515 $ 47,506 $ 40,726Operatingincome . . . . . . . . . . . . . . . . . 10,111 13,586 10,516(b)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 27,629 30,047 23,701Capitalexpenditures . . . . . . . . . . . . . . . 577 938 1,372Depreciation&amortization . . . . . . . . . 1,142 1,085 876

ELECTRONIC SYSTEMS DIVISIONSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,278 $ 56,219 $ 47,049Operatingincome . . . . . . . . . . . . . . . . . 10,850 8,916 4,492Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 25,175 20,191 17,382Capitalexpenditures . . . . . . . . . . . . . . . 1,357 1,612 1,201Depreciation&amortization . . . . . . . . . 1,086 871 880

AEROSTARSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,654 $ 18,009 $ 21,654Operatingincome . . . . . . . . . . . . . . . . . 707 2,133 3,609Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 8,161 6,837 7,492Capitalexpenditures . . . . . . . . . . . . . . . 812 179 542Depreciation&amortization . . . . . . . . . 375 359 389

REPORTABLE SEGMENTS TOTALSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086Operatingincome . . . . . . . . . . . . . . . . . 45,108 44,542 34,356(b)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 102,953 90,587 73,756Capitalexpenditures . . . . . . . . . . . . . . . 16,012 10,088 7,075Depreciation&amortization . . . . . . . . . 5,490 4,751 3,548

CORPORATE & OTHER(a)

Operating(loss)fromsoldbusiness . . . . $ — $ (79) $ —Operating(loss)from administrativeexpenses . . . . . . . . . . (6,806) (7,179) (6,494)Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 16,811 15,570 14,753Capitalexpenditures . . . . . . . . . . . . . . . 510 270 466Depreciation&amortization . . . . . . . . . 395 400 293

TOTAL COMPANYSales . . . . . . . . . . . . . . . . . . . . . . . . . . . $217,529 $204,528 $168,086Operatingincome . . . . . . . . . . . . . . . . . 38,302 37,284 27,862(b)

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 119,764 106,157 88,509Capitalexpenditures . . . . . . . . . . . . . . . 16,522 10,358 7,541Depreciation&amortization . . . . . . . . . 5,885 5,151 3,841

(a)Assets are principally cash, investments, deferred taxes and notes receivable.

(b)Includes a $1.3 million pretax writeoff of assets related to the Fluent Systems product line (see Note 5).

SalestoacustomeroftheElectronicSystemssegmentaccountedfor10%ofconsolidatedsalesinfiscal2007and14%ofthecompany’sconsolidatedaccountsreceivableatJanuary31,2007 .Nocustomeraccountedformorethan10%ofthecompany’sconsolidatedsalesoraccountsreceivableinfiscal2006or2005 .

SalestocountriesoutsidetheUnitedStates,primarilytoCanada,areasfollows: FortheyearsendedJanuary31Dollars in thousands 2007 2006 2005FlowControls . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,100 $ 6,700 $ 5,000EngineeredFilms . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,300 600ElectronicSystems . . . . . . . . . . . . . . . . . . . . . . 8,700 8,000 4,900Aerostar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 800 500 Totalforeignsales . . . . . . . . . . . . . . . . . . . . $18,700 $16,800 $11,000

Note 14. Quarterly Information (Unaudited)Thecompany’squarterlyinformationispresentedonpage30 .


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Raven Industries, Inc.:

WehavecompletedintegratedauditsofRavenIndustries,Inc .’sconsolidatedfinancialstatementsandofitsinternalcontroloverfinancialreportingasofJanuary31,2007,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates) .Ouropinions,basedonouraudits,arepresentedbelow .

Consolidated financial statementsInouropinion,theaccompanyingconsolidatedbalancesheetsandtherelatedconsolidatedstatementsofincome,ofshareholders’equityandcomprehensiveincomeandofcashflowspresentfairly,inallmaterialrespects,thefinancialpositionofRavenIndustries,Inc .anditssubsidiariesatJanuary31,2007,2006and2005,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedJanuary31,2007inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica .ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement .Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudits .WeconductedourauditsofthesestatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates) .Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement .Anauditoffinancialstatementsincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation .Webelievethatourauditsprovideareasonablebasisforouropinion .

AsdescribedinNote7totheconsolidatedfinancialstatements,effectiveJanuary31,2007,theCompanyadoptedtheprovisionsofFinancialAccountingStandardsBoardStatementNo .158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

Internal control over financial reportingAlso,inouropinion,management’sassessment,includedinManagement’sReportonInternalControloverFinancialReportingappearingonpage31ofthe2007AnnualReporttoShareholders,thattheCompanymaintainedeffectiveinternalcontroloverfinancialreportingasofJanuary31,2007basedoncriteriaestablishedinInternal Control - Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),isfairlystated,inallmaterialrespects,basedonthosecriteria .Furthermore,inouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofJanuary31,2007,basedoncriteriaestablishedinInternal Control - Integrated FrameworkissuedbytheCOSO .TheCompany’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting .Ourresponsibilityistoexpressopinionsonmanagement’sassessmentandontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingbasedonouraudit .WeconductedourauditofinternalcontroloverfinancialreportinginaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates) .Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects .Anauditofinternalcontroloverfinancialreportingincludesobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsidernecessaryinthecircumstances .Webelievethatourauditprovidesareasonablebasisforouropinions .

Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples .Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(i)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(ii)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(iii)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements .

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements .Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate .

PricewaterhouseCoopersLLPMinneapolis,MinnesotaMarch22,2007

44

BOARD OF DIRECTORS

Anthony W. BourPresident & Chief Executive Officer,Showplace Wood Products, Inc ., Sioux Falls, SD; Director since: 1995

David A. ChristensenFormer President & Chief Executive Officer,Raven Industries, Inc ., Sioux Falls, SD; Director since: 1971

Thomas S. EveristPresident,The Everist Company, Sioux Falls, SD; Director since: 1996

Mark E. GriffinPresident & Chief Executive Officer,Lewis Drugs, Inc ., Sioux Falls, SD; Director since: 1987

Conrad J. HoigaardChairman of the Board,Raven Industries, Inc .; Chairman of the Board, Hoigaard’s Inc ., Minneapolis, MN; Director since: 1976

Cynthia H. MilliganDean,College of Business Administration, University of Nebraska, Lincoln, Lincoln, NE; Director since: 2001

Ronald M. MoquistPresident & Chief Executive Officer,Raven Industries, Inc ., Sioux Falls, SD; Director since: 1999

The Raven Board held four regular meetings and two special meetings in Fiscal Year 2007. In April 2006, it increased the quarterly dividend for the 20th consecutive year.

Senior Executive Officers Ronald M. Moquist President & Chief Executive Officer, Age: 61, Service 31 years

Thomas Iacarella Vice President & Chief Financial Officer. Age: 53, Service 15 years

Senior Management David R. Bair Division Vice President & General Manager–Electronic Systems Division, Age: 50, Service 8 years James D. Groninger Division Vice President & General Manager–Engineered Films Division, Age: 48, Service 20 years Barbara K. Ohme Vice President–Administration, Age: 59, Service 19 years

Daniel A. Rykhus Executive Vice President, General Manager–Flow Controls Division, Age: 42, Service 17 years Mark L. West President–Aerostar International, Inc., Age: 53, Service 25 years

Audit CommitteeThomas S. Everist, Chair Anthony W. Bour Cynthia H. Milligan

The Audit Committee held two meetings to review the activities and independence of Raven’s external auditors . It also reviewed the auditor’s findings regarding Raven’s financial reporting process, related internal and disclosure controls and compliance with applicable standards .

Personnel and Compensation CommitteeDavid A. Christensen, Chair Mark E. Griffin Conrad J. Hoigaard

The Personnel and Compensation Committee held three meetings to review and approve executive compensation plans, policies and practices, and key succession plans .

Governance CommitteeCynthia H. Milligan, Chair Anthony W. Bour David A. Christensen Thomas S. Everist Mark E. Griffin Conrad J. Hoigaard

The Governance Committee held two meetings to review corporate bylaws, corporate governance standards, and assess the Board’s effectiveness . This Committee is responsible for the Board nomination process .

FORWARD-LOOKING STATEMENTSCertain statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securi-ties Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words “anticipates,” “believes,” “expects,” “intends,” “may,” “plans” and similar expressions are intended to identify forward-looking statements. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect certain of the Company’s primary markets, such as agriculture and construction, or changes in competition, raw material availability, technology or relationships with the Compa-ny’s largest customers, any of which could adversely impact any of the Company’s product lines, as well as other risks described in the Company’s 10-K under Item 1A. The foregoing list is not exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.

Annual Meeting May 22, 2007, 9:00 a.m. Ramkota Hotel and Conference Center 3200 W. Maple Avenue Sioux Falls, SD

Dividend Reinvestment Plan Raven Industries, Inc. sponsors a Dividend Reinvestment Plan so shareholders can purchase additional Raven common stock without paying any brokerage commission or fees. For more information on how you can take advantage of this plan, contact your broker, our stock transfer agent or write to our Investor Relations Department.

Dividend Policy Our policy is to return about 30% of the company’s earnings to shareholders as a dividend. Each year our board of directors reviews Raven’s dividend. Fiscal 2007 represented the 20th-consecutive year we raised our annual dividend: a 29% increase to 36 cents per share.

Raven Web Site www.ravenind.com

Stock Quotations Listed on the Nasdaq Stock Market—RAVN

Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Minneapolis, MN

Stock Transfer Agent & Registrar Wells Fargo Bank, N.A. 161 N. Concord Exchange P.O. Box 64854 South St. Paul, MN 55164-0854 Phone: 1-800-468-9716

Form 10-K Upon written request, Raven Industries, Inc.’s Form 10-K for the fiscal year ended January 31, 2007, which has been filed with the Securities and Exchange Commission, is available free of charge.

Affirmative Action Plan Raven Industries, Inc. and Aerostar International, Inc. are Equal Employment Opportunity Employers with approved affirmative action plans.

Direct inquires to: Raven Industries, Inc. Attention: Investor Relations P.O. Box 5107 Sioux Falls, SD 57117-5107 Phone: 605-336-2750

INVESTOR INFORMATION

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Total Return IndexBase Year = 100

Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007

Raven Industries Inc SP1500 Industrial Machinery Russell 2000 Index

This graph compares the returns investors would have earned from stock price increases and dividend reinvestment if they purchased $100 of Raven stock or the same amount in one of these two indices on January 31, 2002. Their investment in Raven would have reached $561.83, versus $187.23 for the S&P 1500 Industrial Machinery Index and $176.56 in the Russell 2000 Index.

Raven IndustriesP.O. Box 5107Sioux Falls, SD 57117-5107

RAVEN

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